Fund of Funds

Fund of Funds (FoF) is a mutual fund which invests in the units of other mutual funds including but not limited to index funds and ETFs. The underlying funds may or not be managed by the same Asset Management Companies (AMC) which is managing the FoF.

What is Fund of Funds?

For instance an upcoming band in town is buying new instrument such as Kick Drums, Hi-Hats, Guitar and keyboards. Instead of buying all these instruments distinctly, the lead musician of the band decides to go and buy all the different musical instruments at one place. Buying all the instruments under one roof offers him convenience, reduces his time and effort to search and do due diligence. And in case of after sales, he doesn’t have to roam around to different places.

Fund of Funds is similar to that music shop which sells different music instrument at one place. Fund of fund combines different units of mutual funds scheme with different characteristic and distinct risk and return profile. Carefully combining different scheme offers the benefit of diversification, which an investor can get access to simply via single fund of fund instead of buying different funds.

Since it combines units of mutual funds scheme which may be managed by different fund manager/AMC, fund of fund is also known as multi-manager investment

What are the benefits of investing in Fund of Funds?

• Diversification: By investing in different units of mutual funds which in turn invests in different underlying asset or asset subclass, offers the benefit of diversification and reduces the risk.
• Access: Fund of Funds enables investor to access different asset class such as gold, equity, debt or access to distinct traits of same asset class such as within equity take exposure in large-caps, mid-caps and small caps. Such “n” numbers of schemes can be packaged and investor can get access to such different flavours
• Small Investment: Suppose an investor has only Rs. 500/- to invest and he wants to get exposure to different market cap segment within Equity. In such cases an investor can invest a in fund of funds which invests in different market cap segment.
• Asset Allocation:Fund of Funds can be preferred route of investment for performing asset allocation which may be taken care by the FOF scheme depending on its objective. For instance, while considering asset allocation investor is always in a dilemma as to which funds to subscribe? How to rebalance my portfolio? What should be my allocation? Are funds chosen well diversified.
• Exposure to ETFs: An investor can take exposure to ETFs in case he/she doesn’t have a DEMAT account via fund of funds of which invests in ETFs. An investor can also do SIP in ETF via the fund of funds route. FOF in such cases will also take care of the investor concern about liquidity on exchange and cost associated with brokerage, spread on exchange etc.
• Reduce tax incidents: Fund of Funds which does asset allocation will absorb the tax implication involved while buying and selling the units of mutual funds and the overall tax impact for the investor will be lower.
• Equity Taxation Benefit: A Fund of Funds will get equity taxation benefit if it invests at least 90% of its total proceed in units of mutual funds which are traded on recognized stock exchange such as ETFs and in turn such units invests at least 90% of its total proceed in equity shares of domestic companies listed on a recognized stock exchange.

What is specific risk associated with Fund of Funds (FoF)?

Investors should note that they will be bearing the recurring expenses of the relevant fund of fund scheme in addition to the expenses of the underlying schemes in which the fund of fund scheme makes investment.

In such cases, investor should study about the underlying of fund of funds. For instance, if an underlying is ETFs, the cost of fund of fund including cost of ETFs will be usually lower than fund of fund with underlying being actively managed schemes, since the TER of ETF is itself very low.

Disclaimer

The aforesaid information is general in nature and is intended for educational purposes only. It doesn’t offer or solicit a particular product. Investor should consider financial advisor for investment and taxation purpose.

An Investor Education and Awareness Initiative by Mirae Asset Mutual Fund.
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.