Fund of Funds (FoFs) are mutual funds that invest in other mutual funds rather than directly in stocks, bonds, or other securities. These funds provide investors with a way to achieve diversification across different asset classes or geographic regions through a single investment.
Characteristics:
1. Diversification: FoFs offer diversification benefits by investing in a portfolio of mutual funds managed by different asset management companies (AMCs).
2. Asset Class Exposure: FoFs can invest in equity funds, debt funds, gold funds, international funds, or a combination thereof, depending on the investment objective of the FoF.
3. Professional Management: Managed by professional fund managers who allocate assets across various underlying mutual funds based on market conditions and investment goals.
Types of Fund of Funds:
1. Equity Fund of Funds:
- Invest in diversified equity mutual funds across various market capitalizations (large cap, mid cap, small cap) and sectors.
- Example: ICICI Prudential Equity - Arbitrage Fund of Funds.
2. Debt Fund of Funds:
- Invest in different debt mutual funds based on credit quality, duration, and types of debt instruments.
- Example: Axis Debt Fund of Funds.
3. International Fund of Funds:
- Invest in mutual funds that focus on international markets, providing exposure to global equities or bonds.
- Example: Franklin India Feeder - Franklin U.S. Opportunities Fund.
4. Gold Fund of Funds:
- Invest in mutual funds that track the performance of gold ETFs or other gold-related funds.
- Example: SBI Gold Fund.
5. Balanced Fund of Funds:
- Allocate assets between equity and debt mutual funds to achieve a balanced portfolio.
- Example: HDFC Balanced Advantage Fund of Funds.
Benefits:
- Diversification: FoFs offer diversification across different mutual funds and asset classes, reducing portfolio risk.
- Convenience: Provides a single investment option to access multiple mutual funds managed by different AMCs.
- Professional Management: Managed by experienced fund managers who allocate assets based on market opportunities and risk management.
Risks:
- Expense Ratio: FoFs may have higher expense ratios compared to direct investments in mutual funds due to management fees of underlying funds.
- Double Layer of Fees: Investors pay fees at both the FoF level and the underlying mutual fund level, which can impact overall returns.
Taxation:
- Taxation of FoFs depends on the underlying mutual funds in which the FoF invests. For example, equity-oriented FoFs are taxed like equity funds, while debt-oriented FoFs are taxed like debt funds.
Examples of Fund of Funds in India:
1. ICICI Prudential Equity - Arbitrage Fund of Funds:
- Invests in equity arbitrage funds that aim to exploit price differentials between cash and derivative markets.
2. Axis Debt Fund of Funds:
- Invests in debt mutual funds across various durations and credit qualities.
3. Franklin India Feeder - Franklin U.S. Opportunities Fund:
- Invests in Franklin U.S. Opportunities Fund, providing Indian investors exposure to U.S. equity markets.
4. SBI Gold Fund:
- Invests in mutual funds that track the performance of gold ETFs, offering exposure to gold as an asset class.
5. HDFC Balanced Advantage Fund of Funds:
- Allocates assets between equity and debt mutual funds based on market conditions to optimize risk-adjusted returns.
Conclusion:
Fund of Funds provide investors with a convenient way to achieve diversification across asset classes or geographic regions through a single investment. They are suitable for investors looking to delegate asset allocation decisions to professional fund managers and gain exposure to a diversified portfolio of mutual funds. However, investors should consider the fees, taxation, and investment objectives of FoFs before making investment decisions. Consulting with a financial advisor can help determine if Fund of Funds align with your investment goals and risk tolerance.