Saturday, May 18

Funds of Funds (FoF): Meaning & How it Works?

Funds of Funds(FoF) is a type of mutual fund that utilizes pooled resources of investors to put money in different mutual funds available in the market. Alternatively, investments in AIFs can also be done via these mutual funds.

Additionally, the degree of risk in portfolios of FoF varies according to the main objective of the fund manager. For instance, if the manager’s main goal is to earn the highest possible returns, mutual funds with higher net asset value will be targeted, even though it can cause much risk. But, if the main aim is stability, low-risk instruments will be targeted.

Furthermore, the main characteristic of these funds is that they are managed by highly skilled and experienced professionals, ensuring accuracy in market prediction to a certain extent and reducing the risk chances. But, if you still don’t clearly understand what FoF is, this article will analyze the concept and working of FoF.

How Do FoFs Work?

The main aim of FoF mutual funds is to allocate assets properly and diversify portfolios by investing in various funds. Also, there are different types of FoFs, to act on different investment schemes, and they can be structured as a mutual fund, private equity, or investment trust. Moreover, FoF can also invest in external funds and portfolios managed by one investment company.

Types of FoF

1)   Multi-Asset Funds or Asset Allocators

These FoF types of mutual funds aim to diversify their portfolio by investing in other funds across various assets. For instance, FoF has one mutual fund scheme that invests in stocks and one debt fund scheme that invests in bonds; this strategy aims to provide disclosure to a diverse variety of assets. Also, you don’t have to worry about managing multi-assets as fund managers must select one or two funds from each asset, while fund managers of the substratum scheme can take care of the stock selections.

2)   Gold FoF

Gold funds refer to trade in gold instruments by purchasing a unit of gold ETFs; depending on the asset management company, gold funds can have portfolios of schemes or different gold trading entities.

3)   International Funds

These FoFs invest in global companies in the international market. So, suppose you are an investor in international funds of funds. In that case, you will get the indirect disclosure of large multinational companies without the inconvenience of opening a trading account with an international broker. Additionally, this indirect exposure to MNCs ensures a healthy diversification in the portfolio.

4)   Debt Funds of Funds(FoF)

Debt funds of funds invest in other debt schemes. In other words, when you invest in these funds, the fund manager invests your amount in different debt funds rather than directly investing in bonds. Also, these funds offer you tax-efficient rebalancing and avoid the botheration of multiple schemes.

 Benefits of FoFs

➢    Low Resource Requirement

If you want to make an investment and earn higher returns but have limited financial resources, then FoFs are a great choice to consider. It allows an investor with fewer financial resources to invest in top funds and also avails monthly investment schemes while choosing a fund to invest in.

➢    Management of Funds by Professionals

 Fund of Fund is operated by highly skilled and experienced professionals, ensuring market prediction accuracy through proper analyses and calculations and high returns through intricate investment strategies.

➢    Diversify Portfolio

Funds of Funds consider various mutual funds with excellent performance in the market specializing in a particular asset; this ensures high returns with optimized risk.

➢    Convenient Investment in International Markets

International FoFs make investing in global markets easier and get indirect exposure from large MNCs. And the best part is that you don’t have to open an account with any international agents, so that you can invest easily in international funds without any hassle.

Conclusion

To wrap up, funds of funds are the perfect choice for small investors who want access to invest in a range of different asset classes or for those who are looking for organized management of their funds by professionals. Besides providing these benefits, FoF also offers investors benefits from passive investments.

However, before investing in FoFs, ensure there aren’t a lot of portfolios extended with other assets and that investments are well aligned with your risk appetite or investment strategy.