A Fund of Funds (FoF) is an investment strategy where a fund invests in a portfolio of other investment funds rather than directly in individual securities such as stocks or bonds.
In other words, it is a fund that pools capital from investors and allocates that capital to a diversified range of underlying funds.
Some key characteristics and features of Fund of Funds include:
Diversification: FOFs aim to achieve broad diversification and minimal risk by investing in a collection of mutual funds, which in turn invest in diverse assets such as equity and debt securities.
Professional Management: FOFs are managed by highly trained individuals with years of experience, which can lead to high yields through proper analysis and calculated market predictions.
Expense Ratios: FOFs tend to have higher expense ratios than regular mutual funds due to the additional layer of fund management and added expenses associated with choosing the right assets to invest in.
Investment Portfolio: The fund's investment portfolio consists of mutual fund schemes rather than direct investment in equity and debt securities, and it may also invest in hedge funds or ETFs.
Investment Strategy: FOFs can be "fettered," meaning they invest only in funds managed by the same investment company, or "unfettered," meaning they can invest in external funds run by other managers.
Access to Different Asset Classes: FoFs provide investors with exposure to a broader range of asset classes and investment strategies than they might be able to access individually. This can include stocks, bonds, real estate, commodities, and other types of investment vehicles.
Risk Management: Fund of Funds managers often actively monitor and manage risk within the portfolio. They may adjust allocations based on market conditions, economic trends, and the performance of underlying funds to mitigate potential losses.
Ease of Management: For investors who may not have the time, expertise, or resources to build and manage a diversified investment portfolio themselves, FoFs offer a convenient option. Investors can gain exposure to various markets and strategies through a single investment.
Tax: Tax levied on a fund of funds are payable by an investor, only during redemption of the principal amount. However, during recovery, both short-term and long-term capital gains are subjected to tax deductions, depending upon the annual income of the investor and the time of investment. It should be noted that the dividend received on the investment is not taxable, as the burden is borne by the issuing fund house.
In India, FOFs are treated as non-equity funds and consequently taxed accordingly, even though they may be investing in equity-oriented funds. The main objective of a FOF is to provide investors with diversification across various asset classes and sectors
FOFs can be categorized into different types, such as:
Asset Allocator or Multi-Asset Funds: These FOFs invest in a mix of asset classes, such as equity, debt, and real estate, to provide investors with exposure to a diversified portfolio.
Equity-oriented FOFs: These FOFs primarily invest in equity-oriented mutual funds, providing investors with exposure to the stock market.
Debt-oriented FOFs: These FOFs invest in debt-oriented mutual funds, providing investors with exposure to the fixed-income market.
Sector-specific FOFs: These FOFs invest in mutual funds that specialize in a particular sector, such as technology or healthcare.
Some of the top-performing FOFs in India include:
PGIM India Global Equity Opportunities Fund - Direct Plan-Growth
Tata Nifty India Digital ETF Fund of Fund - Direct Plan-Growth
Franklin India Dynamic Asset Allocation Fund of Funds - Direct – Growth
Motilal Oswal Nasdaq 100 Fund of Fund - Regular Plan-Growth
Franklin India Multi-Asset Solution Fund of Funds - Direct Plan-Growth
DSP Global Allocation Fund of Fund - Regular Plan-Growth
In summary, Fund of Funds offer investors the benefits of diversification, professional management, and access to a variety of mutual funds and other investment vehicles, but they may come with higher expense ratios compared to standard mutual funds.
However, there are also some disadvantages to investing in FOFs, such as higher expense ratios compared to standard mutual funds and the potential for asset allocation that may not fit an investor's desired asset allocation.
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