Fund of Funds: How does it work

The meaning of a fund of funds (FOF) is a type of Mutual Fund scheme that invests in other mutual fund schemes. The fund of funds aims to achieve diversification and appropriate asset mix in a variety of fund categories. Fund of Funds comprises a mutual fund scheme with different underlying schemes of other funds. Fund of Funds has several benefits. Let us understand them in detail:

1. Professional Fund Management:

Investing in a Fund of Funds gives the investor professional fund management. Out of the 44 registered mutual fund companies in India, it becomes cumbersome to pick a fund that would cater to the diverse needs of investors. In a Fund of Funds, the fund manager picks the mutual fund that is in tandem with the investment mandate.

1. Less exposure to market volatility:

When you invest in Fund of Funds, a lot of research goes into managing the scheme and fund managers generally ensures that that there is no overlapping of underlying portfolios across multiple mutual funds.

1. Low Minimum Investment:

Fund of Funds offers the opportunity to invest in some of the top-performing mutual funds even with a limited investment budget. Also, when the fund manager rebalances fund of funds between equity and debt, the investor won’t have to pay any capital gains tax.

1. Indexation benefit:

Inflation is reducing the purchasing power of our money. Fund of Funds taxation comes with indexation benefits. Indexation is used to adjust the purchase price of an investment to reflect the effect of inflation on it.  Long term capital gain from Fund of Funds are subject to indexation, and indexation lowers the long-term capital gains tax which brings down investor’s taxable income.

1. Ease of investment:

Instead of directly investing in mutual funds, investing in Fund of Funds becomes a hassle-free and convenient option for investors. Thus, an investor would not be required to track multiple portfolios and would instead just have to manage a single mutual fund.

While Fund of Funds is one way to go about building your portfolio. Those preferring a hands-on approach can look at shortlisting mutual funds through a host of quantitative and qualitative parameters. Quantitative parameters could include looking at the fund performance across market cycles, the consistency of the fund performance, the potential to provide risk-adjusted returns over the long term, etc. Qualitative parameters could include the quality of fund management, the fund manager’s philosophy, investment processes followed, etc.

Thus, Fund of Funds seeks to diversify the risk across different asset classes and optimize returns. If you are a first-time investor and want the flexibility of diversifying your investments with a minimum investment budget with limited risk, then you could consider investing in a fund of funds.

Disclaimer: The views expressed here in this Article / Video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The Article / Video has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of the Article / Video should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. None of the Quantum Advisors, Quantum AMC, Quantum Trustee or Quantum Mutual Fund, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in the Article / video.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.