Funds of Funds - Explained

Defining and Using the Term "Fund of Funds"

Instead of investing directly in equities or other asset classes, a Fund of Funds (FoF) is a unique Mutual Fund strategy that invests in Hedge Funds and other Mutual Funds. When you invest in a Debt Mutual Fund, for example, the fund management directly invests your money in debt and debt-related assets. The fund manager will first assign money to a Mutual Fund scheme, and then the Fund of Funds Mutual Fund scheme will invest in funds of equity, debt, or mixed mutual funds in the case of FoF.

What Sets Fund of Funds Apart?

So, does it make a difference whether you invest directly in stocks and bonds? Essentially, Fund of Funds help with portfolio diversification and risk reduction. The FoF will invest in either the same or various fund firms' mutual fund schemes.

Asset allocation funds, gold funds, overseas FoFs, and multimanager investment FoFs are the many types of Fund of Funds available in India.

The Fund of Funds Scheme has a number of advantages.

Diversification

FoF focuses on the best-performing Mutual Funds across all assets and sectors, allowing you to maximise returns while minimising risk. They also put their money into Hedge Funds.

Cost Because FoFs invest in other Mutual Funds, you may be responsible for the cost ratios of all other Mutual Funds, as well as fund manager commissions and other management expenses.

Taxation

FoFs are treated as non-equity schemes for taxation.

Short-term capital gains apply to FoFs held for less than three years and are taxed according to your income tax bracket. Long-term capital gains on FoFs held longer than three years are taxed at a rate of 20% plus indexation.

Investment vistas In India, fund of funds perform well when kept for a long time - often three years or more, depending on market conditions.

Conclusion

The Fund of Funds plan is perfect for investors who want to diversify their portfolios without having to worry about market timing or examining all of the schemes' NAVs. At a moderate risk, a well-diversified investment portfolio delivers decent returns. Before investing in FoFs, make sure you analyse the expenses, risks, and investment goals and make educated selections.