What are Fund of Funds: Top Funds, Types & Its Benefits
Fund of funds or FoF is a mutual fund scheme that invests in other type of mutual funds. This scheme is a safer choice for investors as it exposes them to top-performing funds. An FoF is also called a multi-manager investment.
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What Are Fund of Funds?
These mutual funds use their pooled resources to invest in other kinds of schemes present in the market. In addition, FoFs also invest in hedge funds. Based on the fund manager’s objective, these mutual funds have portfolios with different degrees of risk.
If the manager aims to yield the maximum returns possible, he will choose a fund with higher NAV, even though it involves higher risk. Conversely, if the target is to achieve stability, he will invest the resource pool in low-risk securities.
Who Can Invest in a Fund of Mutual Funds?
An individual with a limited financial resource pool and the willingness to invest for a long-term horizon can choose an FoF. The portfolio consists of a variety of high-valued mutual funds. Investors with low liquidity requirements and comparatively fewer resources can select the FoFs available in the stock market. This scheme helps them to generate maximum yields at lower risks.
If an individual wishes to invest in other mutual fund schemes, they can consider index funds such as Navi Nifty 50 Index Fund. A person can enrol in this fund at just Rs. 500 via SIP. There is no exit load or commission charge for investing with Navi. You can register for this fund through avenues such as Groww, INDmoney, and Paytm Money.
Also Read – Open Ended Mutual Funds
Different Types of Fund of Funds
The best fund of funds includes the following categories:
1. Gold Funds
Investment in various mutual funds, mainly trading in gold instruments, are called gold funds. Depending on the asset management company, this type of fund of funds may have a portfolio of schemes or gold trading entities themselves.
2. Asset Allocation Funds
These schemes comprise a diverse investment pool− with securities consisting of precious metals, debt instruments and equity. These funds draw high returns through the top-performing security and guarantee lower risks because of the presence of stable instruments.
3. ETFs
An FoF mutual fund having a portfolio of exchange-traded funds is a common investment tool in India. Investing in ETFs via fund of funds is more approachable than direct investments in these tools. This is because exchange-traded schemes need a Demat account, whereas investments in ETFs through FoF require no such obligations.
4. Multi-manager Fund of Funds
This is the most common FoF available in the stock market. The asset base includes professionally managed funds with different portfolio concentrations. These schemes primarily have multiple managers, each handling a particular asset present in the fund of mutual funds.
5. International FoFs
These FoFs target mutual funds present in foreign countries. These schemes fetch higher returns through top-performing bonds and stocks of the concerned country.
10 Best Fund of Funds in 2022
Following is a chart of top FOFs in India for your reference:
| Name of the Fund of Funds | Returns in 5 Years |
| Franklin India Feeder – Franklin US Opportunities Fund – Direct Growth | 24.82% |
| Edelweiss Greater China Equity Off-shore Fund – Direct Plan – Growth | 21.90% |
| DSP World Mining Fund – Direct Plan | 17.78% |
| Sundaram Global Brand Fund – Direct Plan | 14.70% |
| ICICI Prudential Asset Allocator Fund (FOF) – Direct Plan | 13.80% |
| Axis Gold Fund – Direct Plan | 10.98% |
| HDFC Gold Fund – Direct Plan | 10.88% |
| Aditya Birla Sun Life Gold Fund – Direct Plan | 10.73% |
| ICICI Prudential Global Stable Equity Fund (FOF) – Direct Plan | 10.61% |
| Quantum Gold Savings Fund – Direct Plan | 10.55% |
Note: NAV & Returns data as of 20 December 2021.
Benefits of Fund of Funds
The advantages of investing in FOF are given below:
1. Experienced Managers
Professionally trained managers having years of experience maintain these schemes. Such managers ensure accurate market forecasting, proper analysis and detailed investment strategies to generate high yields from funds.
2. Diversification
FoFs target various top-performing schemes in the market. Each of these mutual funds specialises in a specific sector or asset of a fund. Hence, this underlying portfolio diversification optimises the risks and returns of such investments.
3. Limited Resource Requirements
An individual can start investing at an affordable price in the best fund of funds to earn higher returns. Some FOFs also offer monthly investment facilities to ease the investors.
Also Read – Total Expense Ratio In Mutual Funds
Final Word
Fund of funds enable investors to benefit from passive investments and get exposure to index funds and ETFs and diversification. In addition, well-informed fund houses monitor FOFs and generate higher returns through these schemes.
Make sure to evaluate your risk-taking capacity and your financial goals for picking the best fund of funds to invest in.
Frequently Asked Questions
1. What are the tax implications of fund of funds?
If a FOF invests 90% or more in India’s equity ETFs (90% or more in stocks of Indian companies), the taxation is similar to that of equity-based funds. If it invests in a mix of domestic equity fund schemes or international funds, the tax rate is the same as that of debt fund schemes.
2. How does a fund of funds work?
For understanding how an FoF functions, an investor needs to know the concepts of unfettered and fettered management. Unfettered management refers to a situation in which a mutual fund invests in external mutual funds, i.e. in funds of other asset management companies (AMCs).
In contrast, fettered management denotes a situation in which a mutual fund invests in the funds and assets of its own company.
3. Which FoFs are considered to be the safest?
Gold fund of funds are considered to be one of the safest investments. Investing in gold funds is similar to buying physical gold items without the issues such as wealth tax, sales tax or GST. The investment is safe since the market price of gold never drops extensively and, therefore, draws favourable yields.
4. What are expense ratios?
An expense ratio signifies a fee that covers the operating costs of a mutual fund annually. The costs include the manager’s salary, auditing fees, accounting expenses, recordkeeping, registrar fees, legal services and custodial services. It is calculated as operating costs divided by the average value of mutual fund assets.
5. What are some limitations of FoF?
The expense ratio of FoFs is relatively higher than a standard fund. Investors have to bear the recurring costs of the particular FoF scheme along with the costs of the underlying schemes wherein the FoF scheme invests. An investor needs to gain information on the underlying costs of FoFs.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
