Whenever it comes to investing your hard-earned money, a Funds of funds is a secure and wise decision and unquestionably the safest option. Diversification of your investment across numerous funds from various industries and rigorous professional management by skilled fund managers guarantees that your money is protected.
What is Funds of Funds?
A ‘Fund of Funds’ (FOF) is a financial strategy that includes managing a portfolio of other asset vehicles rather than directly investing in stocks, bonds, or other assets. Multi-manager investing is a term used to describe this sort of investment. These plans allow investors to spread their money among many funds, reducing risk. The units of other mutual fund schemes, either from the same or from different mutual fund firms, serve as the underlying investments.
Funds of Funds Meaning
The Fund of funds definition is as follows – it is a type of mutual fund that, rather than directly investing in stocks, securities, commodities, and bonds, invests in a variety of mutual funds. For example, when you simply invest in a mutual fund, it invests your funds directly in the marketplace.
On the other hand, when you invest in a Fund of funds, your money is invested in other mutual funds, which subsequently invest in the market.
- Funds of funds are highly diversified funds that involve a lot of asset balancing.
- They are managed and operated by professional technically-skilled hands.
- Funds of funds involve international exposure too.
- There are chances to be hit by almost over the market indices.
- It requires proper thinking beforehand to invest in these types of funds.
- There is a high return and high-risk exposure.
How does it operate?
If the portfolio manager’s primary goal is to generate the greatest possible returns, mutual funds with greater NAV are the best option, even if they come with a higher level of risk. If the primary goal is stability, however, low-risk instruments will be purchased using the pool of financial resources produced. Depending on the asset management firm’s discretion, these mutual funds can be utilised to invest in both local and overseas funds. This broadens the Fund of funds’ diversity.
What is the core nature of investing in Funds of Funds?
A Fund of funds invests in a variety of top-performing mutual funds, each specialising in a different asset or area of the market. This entails securing benefits through diversity since the underlying portfolio variety optimises both returns and risks.
- Professionally trained managers
Such portfolio managers assure high yields via complicated investment strategies using highly skilled personnel with years of expertise. Proper analysis and calculated market projections generated by such portfolio managers ensure high yields through sophisticated investment methods.
- Resource needs are minimal.
A person with modest financial means can readily invest in the most profitable Fund of funds accessible. When selecting a Fund or funds to invest in, monthly investment options are also available.
What are the benefits of Fund of Funds Investing?
- Tax economic
If you decide to restructure your portfolio, there will be no capital gain on this inside transaction. Consequently, if your Fund of funds is restructured to keep up a stated debt-to-equity ratio, there’ll be no capital gains tax.
- Handling Comfort
With Funds of funds investing, you only have to worry about one NAV and folio. As a result, the more limited the funds that must be handled, the easier it is.
- Qualified Services for Fund Management
Before contributing to individual investments, you may test the market with competently managed funds by investing in a portfolio of funds.
- Portfolio Managers’ Trustworthiness
The legacies of the managers of a Fund of funds must be investigated and confirmed. You may stay assured that your investment is safe.
- Limited-capital investors have an opportunity
Investors with modest funds can participate in varied underlying assets through a Fund of funds. Otherwise, such investors would find it different to gain individual access to these assets.
Who really should put their money into a Fund of Funds?
The fundamental goal of the best Funds of funds is to maximise profits while minimising risk by investing in a diverse portfolio. Individuals with a limited pool of financial resources that they can set aside for a long time can invest in a Mutual Fund like this. Because such funds’ portfolios contain a variety of Mutual Funds, they have access to high-value funds as well.
Investors with little resources and minimal liquidity requirements might consider investing in the market’s top Fund of funds. This allows them to make the most money with the least danger.
Small investors that do not want to incur bigger risks might choose a Fund of funds. Rebalancing investment funds can assist in mitigating risk. Furthermore, it is a good investment option for someone who just has a modest quantity of money to invest each month. Furthermore, individuals with a five-year or longer investment horizon might consider putting money into this fund.
What are the types of Fund of Funds?
- Funds for asset allocation
These funds have a wide asset pool, including stock, debt instruments, precious metals, and other assets, which offer to earn large returns through the best-performing instrument while reducing risk, thanks to the portfolio’s reasonably stable assets.
- Gold mutual funds
Gold funds invest in several mutual funds that specialise in trading gold securities, which contain a portfolio of mutual funds or even gold trading firms, depending on the asset management firm.
- Fund of Funds International
The international Fund of funds focuses on mutual funds that operate in other countries, allowing investors to possibly earn better returns by investing in the country’s best-performing equities and bonds.
- Fund of funds with several managers
This is the most prevalent sort of mutual fund accessible on the market and is made up of a variety of professionally managed Mutual Funds. Each has a particular portfolio focus and includes several portfolio managers, each of whom is responsible for a certain asset in the Mutual Fund.
What should you consider as an investor?
Before selecting to dedicate your assets to these mutual funds, you should have a thorough knowledge of several issues as an investor.
- A top Fund of funds invests long-term, locking in your money for a prolonged period. Before selecting to invest in this sort of mutual fund, be sure your liquidity demands are met through other means.
- Even though the risk element is reduced thanks to the best Fund of funds’ superior management and diversified investments, they are always exposed to market volatility.
- The goal of a Fund of Funds is to make the most of a single, diversified investing strategy. As a result, you must consider your options. The fund’s advantages and disadvantages, select competent fund management and assess your risk appetite, transactional timeframes and tax consequences.
What are the five best Funds of Funds in India?
|India’s Top 5 Funds of Funds|
|Fund of FundsReturns1 year3 year5 yearAditya Birla Sun Life Global Commodities Fund16.583.192.35Kotak Gold Fund-Regular Plan7.413.521.59SBI Gold Fund7.13.591.58HDFC Gold Fund6.583.651.82Axis Gold Fund5.791.890.09|
Best Funds of Funds List
- Aditya Birla Sun Life Gold Fund Growth
- Kotak Asset Allocator Fund – FOF.
- ICICI Prudential Advisor Series – Conservative Fund.
- Nippon India Index Fund – Sensex Plan.
- UTI Nifty Index Fund.
- ICICI Prudential Nifty Index Fund.
- IDFC Nifty Fund.
Pros and Cons
- Tax advantage: You must pay capital gains taxes when you sell one of the mutual funds, i.e., equity to debt or vice versa to shift funds to another (for rebalancing).
- Getting more for less: You don’t have to track numerous schemes because you own multiple asset classes in one. There is just one Net Asset Value (NAV) .
- Professional Service: You can’t invest in multiple asset classes with solid expertise if you just have a limited comprehension of the market.
- You can invest with a small amount of money: You can’t put this little money into stocks, gold, bonds, or anything else since it won’t make a difference.
- Expense Ratio is high: FOF plans have a greater expenditure ratio than other types of schemes.
- Over-diversification: The FOF scheme may hold the same equities across many schemes in some situations.
- Inadequate Transparency: If FOF invests in various mutual funds, it may be difficult for investors to maintain track of each asset portfolio.
- Reduced Returns: Funds in a Fund of funds are diversified, and the returns are likewise lowered due to being hit by higher risk.
Did you know
- Investment in Funds of funds requires great intellectual analysis before starting investing in it.
- With FOF, you require a professional service in which a reputable fund manager manages your portfolio.
- Even with a tiny sum, FOF includes investing in all categories.
- The expense ratio is the percentage of the total earnings that a fund house deducts before distributing it to you.
Words to remember
- Asset balancing
It continual involvement in balancing the portfolio as per the market volatility and performance of instruments.
- International limits
Fund of funds also comprises investments in international equity and debt instruments.
- Risk return allocation
It involves the effective risk-return allocation to balance the NAV value and growth of the fund in both Bearish and Bullish scenarios.
It depicts the number of dividends a fund gives out each year concerning the NAV.
Fund of funds, according to experts, is best suited for smaller investors who want access to a variety of asset classes. Investing in a FOF provides professional wealth management services and knowledge to the investor while also enabling investors with limited funds to have access to diversified portfolios with various underlying assets.
FOFs are a highly essential instrument of financial planning. They attain your goals through smart asset allocation and exclusively specialise in mixing FOFs to provide you with risk-return combinations that suit your requirements
On numerous levels, there is concern that you may wind up paying twice the loan on FOFs. However, most FOFs are meant to keep your costs as low as possible. FOFs charge relatively minimal fees to be competitive
The fact that highly qualified professional portfolio managers manage these mutual funds is a key feature that assures correct market predictions and reduces the risk of losing money.
There are Funds of funds dedicated to commodities such as gold, silver, international stocks, and other asset classes that can let you engage in the commodity upcycle while also de-risking your portfolio risk, which is mostly equities-based.
An investor pays tax on a Fund of funds only when the original amount is redeemed, and both short-term and long-term capital gains are subject to tax deductions based on the investor’s yearly income and investment time.
Read more about Equity Mutual Fund.