What is a Fund of Funds?
Fund of funds is a type of mutual fund scheme that invests in other mutual fund schemes. The fund manager of a fund of funds scheme exclusively holds the portfolio of other mutual funds, instead of stocks and bonds. A certain Fund of Funds might invest in a mutual fund scheme that is part of the same mutual fund house or part of another mutual fund house.
The primary aim of Fund of Funds, which can be overseas as well as domestic in nature, is to allow investors to receive the opportunity to benefit from the tool of diversification since they get to invest in a slew of mutual fund categories. This fund makes for a great bet for risk-averse small investors.
How Does a Fund of Funds Work?
The Fund of Funds is actively managed by a dedicated fund manager, whose primary objective is to assemble the optimal mix of funds and who is responsible for closely monitoring the investments and making necessary adjustments in response to market conditions. In selecting which funds to include, the manager takes into account the financial goals and risk tolerance levels of the investors.
Types of Funds of Funds
- Gold Fund of Funds: It invests in multiple different forms of gold through their basket of mutual funds investments, like mutual funds that invest in physical gold and the funds that invest in stocks of gold mining companies.
- Multi-Manager Fund of Funds: It is one where a basket of professionally managed mutual funds are all invested into and combined to form a single investment portfolio.
- Asset Allocation Fund of Funds: It invests in a variety of asset classes, be it commodities, metals, classic equity-oriented or debt-oriented mutual fund schemes.
- International Fund of Funds: These are investments in international mutual fund schemes that mainly comprise the shares or bonds in global companies.
Advantages of Fund of Funds Schemes
These schemes are easy to handle, track and manage, while they are a great way to diversify investment portfolios. Also, there is to be no taxation on the capital gains earned when you invest in fund of funds schemes with the goal of rebalancing your assets.
Disadvantages of Investing in Fund of Funds
Beware of the tax implications when you opt to sell your fund of funds scheme. Also, the scheme incurs expenses which may impact the overall profitability and there are chances of over-diversification.