Fund of Funds (FoF)

What is Fund of Funds (FoF)?

A Fund of Funds (FoF) is a mutual fund that gathers funds from investors and invests in a number of other mutual funds instead of investing in stocks, bonds, or other securities directly. This structure allows investors to gain diversified exposure to different asset classes, fund strategies, and markets through a single investment.

Key Features of Funds of Funds

• Diversification: By investing in more than a single fund, FoFs reduce risk locked into investment in one asset or sector.
• Professional Management: The mutual fund managers handpick and choose a basket of mutual funds based on investment targets and risk patterns.
• Access to Specialized Funds: Investors obtain exposure to world markets, hedge funds, or other classes of assets not easily accessible.
• Higher Expense Ratio: As an investor in multiple funds, the investors can potentially incur higher management fees and expense ratios.

Funds of Funds Categories

1. Equity FoFs: Invests in equity-oriented mutual funds and invests with the aim to mobilize long-term fund-raising.
2. Debt FoFs: Invests in debt mutual funds, offering investment in fixed income securities.
3. Gold/Sectoral FoFs: Invests in gold fund or sectoral funds to provide a concentrated exposure.
4. International FoFs: Provides access to global markets through investment in international mutual funds or ETFs.
5. Asset Allocation FoFs: Dynamically rebalance investments between equity, debt, and other asset classes based on market conditions.

Who Should Invest?

• New investors who desire professional fund selection and diversification.
• Investors with limited knowledge of the markets and would prefer an all-in-one solution.
• Investors who desire international exposure without directly investing in foreign markets.

Potential Drawbacks

• Higher Costs: Expense ratios are higher since there are multiple layers of management costs.
• Delayed Taxation Benefit: Since FoFs are not actually investing in stocks or bonds, the taxation is on the underlying category of the fund.