By P Saravanan & Abhishek Totawar
MOST INVESTORS KNOW about mutual funds and normally invest in either equity or debt instrument-based funds. But only a couple of investors are conscious that there exist funds which invest in other mutual funds (MFs) or exchange traded funds (ETFs). Such forms of funds are identified as Fund of Funds (FoF). Let us attempt to comprehend what are the salient attributes of FoF, related dangers and what sort of investors should really invest in such funds.
Features of FoFs
They are a sort of mutual fund which utilise their pool of sources by investing in numerous sorts of mutual funds in the market place. Investing in FOFs gives a considerably greater degree of diversification as these invest in several schemes with numerous asset classes. So, commonly FOFs are protected against each higher volatility and quick-term fluctuations. Investment quantity in FOF could be equivalent to that of a common MF investment. Investors can also opt for a systematic investment program (SIP) scheme. Thus, they have all the added benefits such as compounding impact, averaging out, and so on. As FoF invests across the unique schemes, thorough due diligence is carried out by specialist fund managers.
Type of FoFs
According to the investment ideology, FOFs are structured as mutual funds, hedge funds, investment trusts, private equity funds, ETFs, and so on. Some of the well-known FoFs are discussed under.
Asset allocation funds: These F0Fs invest across numerous asset classes ranging from equity, debt to other assets such as gold, metals and commodities.
Foreign or International FoFs: These FoFs invest in mutual fund schemes or bonds or even shares of worldwide organizations.
Gold FoFs: As the name suggests, these funds invest in gold funds. They also invest in physical gold or invest in stocks of gold mining organizations.
ETF FoFs: Exchange Traded Funds invest in a assortment of asset classes such as equity, commodities, and so on. ETF FoFs invest their cash in such ETFs.
Risk although investing in FoFs
FoFs invest in funds and schemes which have their personal expense ratio. On top rated of that, expense ratio of the FOFs is added. So commonly the expense ratio of FoFs is greater than standalone debt or equity mutual fund schemes. Though diversification is excellent, more than-diversification may well not be a excellent concept, since more than-diversified investments may well not be capable to make the ideal use of a unique asset when they are outperforming compared to other assets. As FoFs invest in several equity funds, there is a greater probability of overlapping of asset classes and or instruments.
FoFs are for which investors
Those investors who want to invest in several mutual fund schemes can take into account investing in FOFs as they provide access to investments across numerous schemes. Risk-averse investors can also invest in such funds. However, as like any other sort of investments, FoFs also create excellent returns only if your holding period is more than 3 years. For an Indian smaller investor, an international FoF will give access to worldwide investment possibilities which is not out there in India at present (e.g., investing in the stocks of Apple, Microsoft, Amazon, Google, Tesla, and so on.).
To conclude, FoFs are equivalent to mutual funds which are topic to market place danger and investors need to have to assign an proper weight in their all round portfolio.
The writers are faculty members in IIM Tiruchirappalli
BETTING ON FoFs
FoFs are protected against each higher volatility and quick-term fluctuations due to greater degree of diversification
Expense ratio of FoFs is greater than standalone debt or equity mutual fund schemes
As FoFs invest in several equity funds, there is a greater probability of overlapping of asset classes or instruments
FOFs are structured as mutual funds, hedge funds, investment trusts, private equity funds, ETFs, and so on