A fund of funds or FoF is a mutual fund scheme that invests in other types 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.
This post will help you understand what Fund of Funds, its types and benefits, the 10 Best Fund of Funds you can invest in, tax implications, and more. Read on!
Fund of Funds are mutual funds that use their pooled resources to invest in other kinds of schemes in the market. A prudent combination of different mutual fund schemes in a single FoF will offer you diversification, which mitigates portfolio risk. FoFs also invest in hedge funds. Based on the fund manager’s objective, these mutual funds have portfolios with different degrees of risk.
Since an FoF invests in units of multiple mutual fund schemes that are managed by different fund managers, this type of fund is also called a multi-manager fund.
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.
The best fund of funds includes the following categories:
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.
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.
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.
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.
These FoFs target mutual funds present in foreign countries. These schemes fetch higher returns through top-performing bonds and stocks of the concerned country.
FoFs allocate the investment corpus to different mutual fund schemes. Such schemes, in turn, invest in various asset subclasses, thus reducing the risk through portfolio diversification.
By investing in such funds, you gain access to debt, gold or even to distinct traits of the same asset class. For example, an FoF providing equity exposure may invest in large-cap, mid-cap or small-cap funds. Like this, “n” numbers of schemes can be put together in a fund of funds, providing investors with the opportunity to experience various flavours.
You can start investing in a Fund of Funds with just Rs. 500 only to reap the benefits of this type of mutual fund. Thus, a very small sum of money is required to invest in such financial instruments.
Through such funds, you can get exposure to ETFs even if you do not have a Demat account. You can also do SIP in the ETFs through FoF. These funds also eliminate concerns, such as brokerage cost, liquidity on exchange, spread on exchange, etc.
There is just one folio and one NAV to track, which makes it easier to handle and manage your portfolio.
You can stay assured of the fact that highly experienced and skilled fund managers manage such funds.
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%|
As per the current income tax regime in India, an FoF is considered a non-equity fund even if it invests in equity-oriented mutual fund schemes. Returns earned from the sale of units before 3 years are classified as short term capital gains (STCG). Such gains are taxed as per your income tax slab rate. But if the units are sold post 3 years from the date of purchase, the gains are known as long term capital gains (LTCG). A tax rate of 20% is applicable on LTCG after indexation.
Also Read- Taxation In Mutual Funds
An FoF is a suitable option for you in case you are looking to invest in more than one mutual fund scheme. Furthermore, you may choose to invest in an FoF in case you don’t have a high-risk appetite. Since these mutual fund schemes offer diversification by allocating funds to various schemes, the level of risk is low.
Note that you must make sure to identify your investment objectives and assess your own risk profile before allocating your savings to a fund of funds.
If an individual wish 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.
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
Investment objectives are not the same for all individuals. Such objectives can be long term, short-term and mid-term. Accordingly, your financial goals influence your investments in mutual funds. Ideally, if you have a long-term investment horizon, you can generate substantial returns owing to the power of compounding.
Hence, mutual funds are helpful in achieving long term financial goals, such as financing your child’s education, building a retirement corpus, etc.
That said, there are funds available for you even if you need to fulfil short-term financial goals.
Invest now with the Navi Nifty 50 Index Fund. Mutual Fund investments are subject to market risks, read all scheme-related documents carefully. You may choose to start allocating funds through an SIP or opt for the lump sum route.
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.
Mutual funds are always subject to market-related risks, and your investments are not completely safe and secure no matter how diversified your portfolio is. That said, a fund of funds provides low-risk returns as they invest in multiple mutual fund schemes. Do proper research before investing in a fund.
Ans: No, a fund of funds does not have a lock-in period. You can redeem your units after placing a redemption request.
Ans: Before investing in an FoF, you must consider some essential factors, which include the following:
Past returns of the fund
Ans: No, there are no tax benefits in the case of FoF investments under Section 80C of the Income Tax Act.
Ans: There is no specific time to invest in FoFs. You can invest when you have decided on your financial goals and investment time horizon. However, it is always prudent to assess your risk appetite before investing.
Ans: As per SEBI norms, FoFs that primarily invest in ETFs, index and liquid funds can charge an expense ratio of not more than 1%. The ceiling for FoFs predominantly investing in actively-managed funds is as follows:
For equity-oriented funds: 2.25%
For non-equity-oriented funds: 2%
Ans: 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.
Ans: For understanding how 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.
Ans: Gold 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.
Ans: 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.
Ans: 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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