Fund Of Funds (FOF) is also known as multi-manager investment. It is the strategy of holding the portfolio of other investment funds rather than investing directly in bonds, stocks or securities. The primary aim of the portfolio manager is to yield the highest possible returns. So, the mutual funds with the highest NAV will be targeted even if it is laced with a higher degree of risk. The underlying investments for a FOF are the units of other funds schemes either from other mutual fund houses or the same mutual funds.
The Fund of Funds can be both overseas and domestic. In the case of the foreign funds, the manager will invest in units of offshore mutual fund schemes. They will make sure the risk profile and the investment philosophy match with the fund’s mandate. Below are a few things you must consider before planning an investment.
Things to Consider as a FOF Investor
An experienced fund manager can help you get an idea of tax implications, transactional timelines and your risk tolerance. Investing in a FOF gives you an entire diversified investment portfolio at once with broad exposure to many different asset classes with minimum risks. The best fund of funds will rely on the principle of deriving the maximum benefit of single diversified investment plans.
It is treated as a non-Equity fund and consequently taxed. The fund of funds invests in equity-oriented funds yet it is not regarded as an equity-oriented fund and the tax benefits currently available are not applicable to a FOF. It is necessary to take a look at the pros and cons before investing for a mature decision.
- Fund of funds mutual funds come with ease of handling since there is only one NAV to track and only one folio.
- Investors can be assured of the fund manager’s credibility since the fund of funds requires a background check of the professionals handling the portfolio.
- Investors can consider investing in professionally managed fund services to test the waters before venturing out on investing individually.
- You do not have to deal with market monitoring, creating investment allocation and making adjustments.
- Ensures a properly allocated and well-diversified risk-appropriate strategy that can support a robust financial plan.
FOFs are typically an excellent choice for small investors who wish to get better exposure with minimal risks compared to directly investing in securities. A few top fund of funds to consider are asset allocation funds, multi-manager fund of funds, gold fund, international fund of funds and ETF fund of funds. An individual even with the most limited financial resources can comfortably invest in FOF to be able to earn decent profits.
Fund of funds mutual funds come with a few limitations. For instance, make sure your cash needs are taken care of by other financial resources since FOFs operate in the long term where you have to lock the investment for a significant period. Make sure to work with experienced managers who can offer intricate strategies to maximise your ROI.
