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What Are Fund Of Funds Schemes And Who Should Invest In Them?

Fund of funds are schemes that invest in other mutual funds. Confused? Read on to know all about FoF schemes and how they work.
July 31, 2021

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A mutual fund is a pool of money that invests in assets like stocks and bonds. Everyone knows that. But wait, there’s more. Brace yourselves, there’s a mind-blowing fact coming up. 

Mutual funds can also invest in other mutual funds! Such mutual funds are called “fund of funds”. In this story, we’ll help you understand the ins and outs of fund of funds schemes. 

What Do You Mean By Fund Of Funds?

A fund of funds (FoF) scheme invests in the units of one or more mutual funds. FoFs are not really bound by geography as they can invest in domestic or international mutual funds

This type of investment style adds an extra layer of diversification. You get to own units of a single or even multiple mutual funds in just one fund of funds scheme. 

But the extra layer of diversification or safety comes at a cost, literally. FoF schemes have a relatively high expense ratio compared to other mutual funds. No prizes for guessing why. 

That’s because you’re going to pay an expense ratio on the FoF scheme and each mutual fund that it invests in. A point to note, FoFs can invest in funds from the same AMC or other AMCs as well. 

Are There Multiple Fund Of Funds Schemes?

There are 4 broad types of FoF schemes that investors can access. Let’s take a look at them. 

1. International Fund Of Funds

These FoF schemes basically invest in international mutual funds or offshore funds. Examples of this would be: 

2. Asset Allocation Fund Of Funds

An FoF scheme that falls under this category will invest in a diverse set of mutual funds from the world of equity, debt, or hybrid assets. 

3. Gold Fund Of Funds

Gold FoF schemes invest in mutual funds that primarily invest in gold

4. Multi-Manager Fund Of Funds

Picture this - one fund with different components each managed by its very own fund manager. That’s known as a multi-manager FoF scheme.

5. ETF Of ETFs

Exchange Traded Funds (ETFs) can invest in other ETFs as well. 

Pros And Cons Of Investing In Fund Of Fund Schemes

Pros Of FoF Schemes

Cons Of FoF Schemes

Diversification

High expense ratio

Potentially low risk

Scarce options

Relatively high returns

Not tax-efficient

Professionally managed

Over diversification

Fund of funds schemes are taxed like debt funds regardless of whether they’re invested in equity or hybrid mutual funds. 

Who Should Invest In Fund Of Fund Schemes?

Fund of funds schemes are generally known to be low-risk investments that can generate reasonable returns over the long term. That said, FoF schemes have a higher expense ratio than most mutual funds. 

Thus, FoF schemes are suitable for investors across risk profiles,  This is down to benefits like diversification and professional management. 

But it’s important to choose the right FoF schemes that are reliable and efficient. You can access the best fund of fund schemes on Cube that are handpicked by Cube’s mutual fund advisor, Wealth First. 

Watch this video to know more about Wealth First

Conclusion

Fund of funds schemes invest in other mutual funds instead of following the traditional approach of buying stocks and bonds. They can invest in domestic or international mutual funds.   

FoF schemes are typically defined by top-notch diversification, solid long term returns, and relatively low volatility. However, they carry a high expense ratio because of the multiple mutual funds they invest in. 


Shriram Shekhar
Shriram is a Content Marketer at Cube Wealth, the Financial Freedom App with a smart Perfect Portfolio Planner. He has developed cutting edge IT products for over 2 years before turning to his passion for the written word. Shriram’s love for philosophy, product development, and empowering people through quality content is what got him to Cube Wealth.

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