For an investor hunting to take exposure to equities, there are a wide variety of investment cars to opt for from. One such investment choice is the Fund of Funds (FOF). A FOF is a mutual fund that mainly invests in the units of yet another Mutual Fund scheme. Essentially, it is an investment technique of holding a portfolio of other investment funds rather than investing straight in stocks, bonds, or other securities. The underlying investments could be the units of mutual fund schemes either from the identical fund home or other fund homes.
Types of FOFs:
There are a wide wide variety of FOF selections offered. The underlying can be only equities or it could be a mixture of a variety of asset classes.
1) Asset Allocation FOF
As the name suggests, for asset allocation such a FOF will have funds investing in equity, debt, and gold as its underlying assets. For instance, ICICI Prudential Asset Allocator Fund. If you are an investor hunting for a one-quit remedy for your asset allocation demands, you could look at a FOF which bargains with asset allocation.
2) International FOF
The other broadly well-known category of FOF has international investing as its underlying theme. The fund manager right here invests in Indian mutual fund schemes which invest across a variety of worldwide markets or will invest in mutual funds operating in target markets. For instance, ICICI Prudential Global Advantage Fund. Here, the fund comprises funds that are India-based and invest across each created and emerging markets.
3) Gold-based FOF
A Gold FOF will invest in mutual funds which invest in the yellow metal such as the Gold ETF. For instance, ICICI Prudential Regular Gold Savings Fund (FOF) invests in the ICICI Prudential Gold ETF.
4) ETF FOF
Such a FOF will have ETFs as its underlying. Over the last couple of years, the ETF space has exploded with a wide variety of thematic/sectoral and sensible beta ETFs. The FOF structure is designed such that investors even with no a Demat account can access the ETF. (Demat account is mandatory for investing in ETFs). For instance, ICICI Prudential Nifty Low Vol 30 ETF Fund of Funds (FOF). This FOF invests in ICICI Prudential Nifty Low Vol 30 ETF that replicates the Nifty one hundred Low Volatility 30 Index in the identical proportions. The low vol index is comprised of the steady least volatile stocks in the industry and endeavours to provide greater danger-adjusted returns. In this case, the FOF portfolio consisted of a single ETF.
Another variant in this category is a FOF which delivers exposure to diverse sorts of ETFs inside a single portfolio. One such fund is the ICICI Prudential Passive Strategy Fund (FOF) which actively manages the industry cap, sector/thematic, and element-based allocation by means of ETFs. As of May 2021, the portfolio consists of ETFs based on indices such as S&P BSE 500, Nifty, IT, and BHARAT 22.
5) Debt-based FOF
If you are an investor hunting to allocate towards debt but are unsure which category of fixed earnings mutual fund is appropriate for you, then this FOF can come in handy. Here, the fund manager based on the evolving macros will allocate corpus across categories of funds that are probably to make the most from the prevailing industry predicament.
6) Equity-based FOF
Similar to debt-based FOF, an equity FOF will have exposure to a wide variety of equity mutual funds with varying investment designs inside a single FOF. For instance, The portfolio of ICICI Prudential India Equity FOF consists of eight funds from 5 diverse fund homes. Each of these funds is special in terms of the management style and covers a wide spectrum of stocks across industry capitalisation.
Advantages of FOF
1) Access regardless of restricted capital
Through FOFs, investors even with restricted capital get access to invest across asset classes such as equities, debt, liquid funds, gold, commodities, and specially international indices. Otherwise, accessing each and every of these asset classes individually could prove to be expense-intensive for a lay investor. Similarly, if an person want to invest in some international industry, the expense linked would be pretty much prohibitive in nature when one considers the currency fluctuation aspect as effectively. Now with FOF, an investor will need not be concerned about such challenges.
2) Diversification
Through a single FOF, an investor gets the chance to diversify inside one special asset class or several asset classes based on the FOF selected.
3) Benefit of experienced knowledge
When investing in a FOF, an investor gets the advantage of the portfolio getting managed by a experienced fund manager. This assumes significance specially through occasions of rebalancing. As a lay investor, one could not be in a position to catch the adjust in industry trend or respond immediately based on the adjust in industry circumstances, a deficiency that gets addressed by means of a experienced fund manager.
As FOFs take exposure to several funds, the all round expense/expense ratio tends to be normally greater than person mutual funds but the expenses have regulatory upper limits and therefore it does not pose a roadblock. In the case of ETF FOF, the costs linked have a tendency to be somewhat lesser as the underlying expense of ETF tends to be more affordable. These ETFs provide superb flexibility to the investors in terms of the effectively-diversified portfolio that as well at a lesser expense.
When it comes to taxation, FOF is treated as a non-equity fund. This implies the quick term is defined as up to 3 years (36 months) and the lengthy term is 3 years plus. If the units are sold just after 36 months, a lengthy-term capital achieve tax of 20% with indexation is charged. However, it could be noted that the FOFs with a minimum of 95% in equity ETFs are taxed as per Equity taxation.
To conclude, if you are an investor with restricted know-how of a variety of asset classes and their functioning, investing in a FOF that meets your investment requirement can be a sensible beginning point. This is for the reason that it permits an investor to invest in a diversified portfolio and more than the lengthy term assistance produce improved danger-adjusted returns.
by, Chintan Haria, Head- Product Development & Strategy, ICICI Prudential AMC