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A fund of funds is a mutual fund that invests in other mutual fund schemes. In a regular mutual fund, the fund manager invests in a portfolio of equity or bonds, but in the fund of funds the portfolio manager invests in other mutual funds. This can be good for the investors as they get the benefits of diversification due to investment in many mutual fund categories.
The fund of funds can be domestic or it can be international. In the international fund of fund (FOF) the fund manager invests in units of offshore mutual funds. The strategy of the fund of funds is to achieve diversification through other mutual funds, coming into a single portfolio. The FOF can invest in the portfolio managed by one mutual fund Company or it can invest in the portfolios of several mutual fund companies.
The funds of funds are suited for small investors who can gain access to different asset classes under a single fund. The portfolio constructed can suit investors across risk profiles and financial goals. There is a benefit of diversification as the money gets invested in different fund categories. Investors can even start with a small number of funds to invest every month and it is suitable for investors with an investment horizon of five years and more.
There are different types of fund of funds available where an investor can park their money-
Asset Allocator Fund-
In the asset allocator fund, the allocation to different investment styles, market caps, or asset classes is decided by the fund manager. These funds invest in a mix of equity, debt, and gold mutual funds. The funds can invest in in-house funds or those managed by other asset management companies and are taxed like debt funds.
International fund of fund-
An international fund of funds invests in units of ETFs, index funds, or other mutual funds investing in stocks listed overseas. In this way, the FOF can offer investment ideas and themes that are not available in the domestic market.
Advantages and disadvantages of investing in Fund of Funds-
Advantages-
Convenient to handle-
Instead of investing in multiple mutual funds, a person can invest in a fund of funds which in turn invests in other mutual funds. This reduces the need to invest in many funds and track a big portfolio of funds.
Diversification-
The FOF invests in different mutual funds which in turn invest in various asset classes; so the FOF provides diversification. It can invest in many mutual funds having portfolios across sectors and schemes. The investment may be in an equity mutual fund, gold ETF, debt mutual fund, and real estate mutual fund. In case a particular mutual fund performs well and the other does not, the loss of one can be balanced by the other.
Start investing with a small amount-
An investor can sip a small amount of Rs. 1000 every month and get exposure to different mutual funds through the FOF.
Investing in ETFs-
Investing in ETFs requires a demat account. But you can take exposure to ETFs through a FOF without having a demat account.
Moderate Risk-
The risk profile of investing in FOF is moderate as it invests in other mutual funds and naturally gets diversified.
Multi-Manager Fund-
The fund of funds is managed by at least two fund managers; the fund manager of the mutual fund whose units are being bought by the FOF and the second the fund of fund manager. In this way, the investor gets the benefit of the fund being managed by two experienced fund managers.
Disadvantages-
Higher expense ratio-
The expense ratio is the percentage or the amount of money that an investor pays to the AMC to manage their investment. As the fund of funds has the expense ratios of many mutual funds they invest, which the expense ratio of a fund of funds is always higher.
No say in selection-
The investor does not have any say in the selection of mutual funds. It is the fund manager who decides which funds to invest.
Duplication in assets-
Since the FOF invests in mutual funds having investments across asset classes the various funds may have exposure to the same stocks or gold which can result in duplication.
Some of the Fund of Funds in India are-
1. Aditya Birla Sun Life Financial Planning FOF.
2. Aditya Birla Sun Life Asset Allocator Fund.
3. ICICI Prudential Thematic Advantage Fund.
4. ICICI Prudential Passive Strategy Fund.
5. ICICI Prudential Asset Allocator Fund.
6. ICICI Prudential Global Advantage Fund.
7. Quantum Multi Asset Fund of Funds.
8. Motilal Oswal Multi Asset Fund.
Investors who have a moderate risk appetite and wish to take advantage of a diversified portfolio and the experience of fund managers can consider investing in FOFs. The investment should always be aligned with the risk profile and the asset allocation should be considered. Invest in a FOF with an experienced fund manager after considering the tax implications.