Investors may face a problem in diversifying their portfolios with the right investment options. Even if they manage to identify it, it may require active portfolio management and financial awareness. Many of them may not have the time or knowledge for it, but this does not mean they should compromise on returns. Fund of Funds (FoFs) ideally provides the solution for it by making investments on behalf of the investor.
You may have various questions in your mind. Let us help you know the topic well enough.
Fund of Funds (FoF): Meaning and Features
Fund of Funds (FoF) means an investment option that facilitates investment in mutual funds that are professionally managed and have a well-diversified portfolio. The investor’s capital is invested without directly involving the investor in researching stocks, bonds, or other securities; it indirectly targets most of them at once.
Retail investors who want immediate exposure to a variety of asset classes, fund strategies, or geographical areas without having to manage them separately are particularly drawn to this kind of fund.
Features of FoFs:
- By investing in a variety of mutual funds, multi-layer diversification lowers the risks associated with individual funds.
- Funds are selected by professional managers based on performance, strategy alignment, and other qualitative and quantitative factors
- Individual fund research and tracking are no longer necessary for investors as the portfolio management is simplified.
- Certain FoFs provide access to specific themes (like technology or ESG) or international markets, offering broader diversification and exposure to global trends.
Types of Fund of Funds in India
1. Equity-Driven FoFs
- Invest in a variety of market-cap or sector-specific equity mutual funds.
- Long-term capital growth is the goal.
- Ideal for investors who can take on more risk.
2. Debt-focused FoFs
- Invest in a variety of debt funds, such as corporate bond funds, short-term funds, and liquid funds.
- Provide steady returns at a comparatively low risk.
- Perfect for short-term objectives or conservative investors.
3. Global FoFs
- Make international mutual funds or exchange-traded funds (ETFs) accessible.
- Spread your investments over a variety of foreign stocks and markets.
- Excellent for investors looking to diversify their holdings geographically.
4. FoFs Based on ETFs
- Put money into an exchange-traded fund basket.
- Economical and controlled passively.
- Ideal for investors seeking cheaper, market-linked returns.
5. FoFs for Multi-Asset Allocation
- Mix debt, equity, and occasionally gold funds.
- Automatically distribute risk among various asset classes.
- It is ideal for investors who want a diversified portfolio but their risk-bearing appetite is moderate.
6. Sectoral/Thematic FoFs
- Invest in funds that are centred on particular industries (like tech or pharmaceutical) or topics (like ESG).
- Ideal for strategic investors who have strong opinions about a market or trend.
| Type | Description | Example Fund |
| Equity FoF | Invests in a variety of equity mutual funds from different industries or styles. | HDFC Equity Opportunities Fund FoF |
| Debt FoF | Invests in various debt-oriented funds, such as corporate bonds and liquid funds. | UTI Retirement Benefit Pension Fund |
| International FoF | Gives exposure to international ETFs or mutual funds. | Franklin India Feeder – Franklin U.S. Opportunities FoF |
| ETF-based FoF | Invests in a variety of domestic and foreign exchange-traded funds (ETFs). | ICICI Prudential Asset Allocator FoF |
| Multi-Asset FoF | Combines debt, equity, and occasionally gold funds to provide more diversification. | Kotak Multi Asset Allocation FoF |
Should You Invest in a Fund of Funds?
Whether to invest in FoFs or not is a subjective decision to make. However, will can assist you in knowing the pros and cons so that you can make better decisions.
Pros:
- Immediate Diversification: One investment distributes your risk among several funds, industries, and regions, without requiring you to put extra effort.
- Expert Management: You don’t have to monitor or evaluate individual mutual funds; professionals take care of that for you.
- Access to International Markets: A lot of FoFs provide exposure to foreign funds that aren’t otherwise accessible in India.
- Perfect for Novices: FoFs can be a suitable option for new investors seeking diversified exposure without active management, though costs and performance should be considered.
- Asset Allocation Flexibility: Certain FoFs automatically modify risk levels by dynamically rebalancing between debt and equity.
Cons:
- Double Expense Ratio: Net returns are decreased by paying fees for both the FoF and each underlying fund.
- Performance Drag: Because of conservative tactics or overlap, returns might be less than those of direct equity or mutual fund investments.
- Over-Diversification: An excessive number of funds can reduce the impact of those that perform well and make it more difficult to monitor fund overlap.
- Costs: Expense ratios of FoFs tend to be higher than direct mutual funds or ETFs, impacting returns over time.
Bottomline
The conclusion can be drawn that FoFs are indeed a great investment option if you want to diversify your portfolio without actually going out there and identifying the investment options. However, it is advised to choose a fund that aligns with your investment goal to make good returns. The article above states the types of FoFs available to assist you with the same.
Investors can use this option to save their time and effort without compromising on a good and diversified portfolio.
Written by: Tanya Kumari
