You might have heard mutual funds which invest in direct equity of several companies. In this post we will discuss about funds which invest in other funds rather than direct equity. Such funds are called ‘Fund of Funds, (FOF)’. As mentioned earlier also, these funds include other investment funds in its portfolio rather than investing in direct equity.
We all know that mutual funds diversify risk by investing your money in several companies. The FOF further diversify the risk by investing the money in other funds. These funds are suitable for investors who want to invest their funds in less risky assets.
As per the income tax law of India, these Fund of Funds are treated as non-equity funds and taxed accordingly. Even though FOFs may invest in equity funds, these may not be treated as equity funds and the tax benefits currently available to equity funds are not available for these type of funds.
Advantages and Disadvantages of Fund of Funds
| Advantages | Disadvantages |
| More diversification | Additional fee |
| Less Risk | Risk of overlap in holdings |
| Professional wealth management & expertise | Tax benefits of equity funds are not available |
Type of Fund of Funds
Gold Funds
These funds invest in mutual funds which primarily trading in gold securities.
Multi Manager Fund of Funds
These are the most common type of fund of funds available in the market. These funds comprise of many professionally managed funds. A multi-manager fund of funds usually has multiple portfolio managers, each dealing with a specific asset present in the Mutual Fund.
International Fund of Funds
These type of funds invest in mutual funds investing in equities of foreign countries. These funds are best for the investors who want to have exposure of foreign country equities without directly investing in them.
Asset Allocation Funds
These funds keep in their portfolio other mutual funds investing in different asset class such as equity, debt instruments, precious metals, etc. These funds diversify your money in theses asset classes and thus reduce risk.
Some Popular Fund of Funds Available in India
Some of the most popular ‘FoFs’ available in India which have the potential to give decent returns are as follows:
Kotak Asset Allocator Fund – FOF Growth
ICICI Prudential Advisor Series – Hybrid Fund Growth.
Franklin India Dynamic PE Ratio Fund of Funds Growth.
ICICI Prudential Advisor Series – Conservative Fund Growth
ICICI Prudential Advisor Series – Debt Management Fund Growth.
Nippon India Index Fund – Sensex Plan Growth.
Conclusion
Fund of funds (FOFs) are the mutual funds investing in other mutual funds and they don’t invest direct in equity. There may be different types of FOFs based on their investment strategy like international FOFs, multi- asset FOFs, Gold FOFs, etc. The advantages of FOFs are more diversification, less risk, etc. while there are some disadvantages of the FOFs also like, additional layers of fees, risk of overlapping of holdings, not having tax benefits of equity mutual funds, etc. These asset classes are suitable for investors who do not want to take more risk and seeking for more diversification in their portfolio.
Also read: Equity Investment! Pros and Cons
