Fund of Funds (FOF): meaning, types & advantages

If you want to invest your savings in an investment that offers good returns in long term, Mutual Funds are one of the best options. However, there are multiple types of Mutual Funds, and you should try to invest in different types for diversification. Consider investing in a Fund of Funds (FoF), a unique Mutual Fund that invests in other funds.

What is a Fund of Funds?

A Fund of Funds (FoF) is a Mutual Fund that pools money from investors to buy units of other Mutual Funds. This fund does not invest in securities like shares and debentures. The fund pool is invested in multiple types of funds, such as Global Funds, Exchange-traded Funds (ETFs), and Gold Funds.

Types of Funds of Funds

• Multi-Asset Fund of Funds: Invests in a mix of asset types such as equity, debt, gold, or real estate.
• Single Strategy Fund of Funds: Focuses on a single investment strategy, such as value, growth, or high dividends.
• Regional or Geographic Fund of Funds: Allocates investments in funds targeting specific regions or countries, like Asian or European funds.
• Sector-Specific Fund of Funds: Concentrates on funds that operate in a particular sector, such as technology, healthcare, or energy.
• Passive Fund of Funds: Invests in index funds or ETFs to mimic the performance of market indices.
• Active Fund of Funds: Fund managers actively select and adjust underlying funds to maximise your returns.

Advantages of FoFs

• Diversification: Through a FoF, you can invest in multiple Mutual Funds. This reduces the risk of concentrating on a single investment.
• Professional management: Experienced fund managers select and track the underlying funds, ensuring you get the best possible returns.
• Access to diverse strategies: FoFs provide exposure to specialised strategies, which might be challenging for individual investors to access directly.
• Risk mitigation: FoFs reduce your overall portfolio risk by investing in various Mutual Fund types and diversifying your portfolio.

Disadvantages of FoFs

• Costs and fees: Investing in FoFs can be expensive. These funds charge their fees in addition to the expenses of the underlying funds.
• Potential over-diversification: Your portfolio could become over-diversified, which might reduce the returns.
• Performance dependency: When you invest in FoFs, your returns depend on the performance of the underlying funds, which means you have less control.
• Lack of control: You won’t have a say in the selection or allocation of funds, leaving those decisions solely in the hands of the fund manager.

Who should invest in a Fund of Funds?

• If you are a beginner investor looking for a simple way to have a diversified portfolio managed by professionals.
• If you want to diversify your Mutual Funds portfolio.
• If you lack the time or expertise to research and manage multiple investments yourself.
• If you are looking for global exposure without actively devoting the time to invest in international Mutual Funds.

Also Read: A guide to redeeming your Mutual Funds

Conclusion

A Fund of Fund allows you to invest in multiple Mutual Funds without having a complex portfolio. The fund managers use their expertise to invest in a combination of funds that provides the best returns. Make sure you choose the right FoF by checking their past performance, their investments, and the history of the fund managers.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.