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All you need to know about the fund of funds

When you are an investor, you are always on the lookout for lucrative schemes which can help you grow your wealth. While mutual fund investments are always subject to market risks, these can help you to grow your wealth better than many other kinds of instruments, like fixed deposits, deposit certificates, etc.

What is a fund of funds?

A fund of funds can be defined as a scheme in mutual funds, where the money of this kind of fund is utilised to invest in hedge funds as well as other mutual funds available in the market. While conventional mutual funds invest in a range of stocks of different companies, funds of funds invest in a range of different mutual funds.

Here are the different types of fund of funds:

Gold funds: All the investments in this kind of fund of funds mutual funds are primarily related to gold schemes. You will also find some investment portfolios that have an Exchange Traded Fund (ETF), which invests in gold-related schemes.

Asset allocation funds: These funds believe in portfolio differentiation and diversification, as they invest in multiple instruments like shares, debentures, etc. One can expect higher returns with minimal risk in these funds.

ETF funds of Funds: These funds primarily invest in different kinds of ETFs and you do not need a demat account to invest in ETFs through this mode. However, these funds carry a slightly higher risk because ETFs, like shares, are traded in the stock market.

There are other kinds of funds as well, like multi-manager funds of funds, and international funds of funds.

Advantages of funds of funds:

  • Since these funds invest in different mutual funds, the risk is minimal and there is a lot of diversity in the fund. While mutual funds are diverse in nature with minimal risk, funds of funds are even more diverse due to their direct investment in mutual funds in India.
  • Experienced fund managers who have the expertise and bandwidth to analyse and predict market movements manage these funds.
  • This is available for all types of investors, and anyone can invest in funds of funds.

Disadvantages of funds of funds:

  • Like all mutual fund investments, you need to pay taxes on funds of funds, but the dividend income is exempted from taxation.
  • The expense ratio is slightly higher than mutual funds since it requires a more hands-on approach to managing the funds.

The bottom line

If you are willing to consider funds of funds, you can easily do so online after assessing different plans and schemes. Also, if you keep this article in mind, you will find it easier when making your investment in the best fund of funds. However, ensure that you read up on the mutual funds that the funds of funds are investing in and what their objective is before investing your money.

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