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
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:
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. You can consult a Cube Wealth coach or download the Cube Wealth app.
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. You can consult a Cube Wealth coach or download the Cube Wealth app
FAQ
1. How do Fund of Funds (FoF) schemes work?
Ans. FoF schemes pool money from investors and invest in a selection of other mutual funds managed by the same or different asset management companies. These underlying funds can cover various asset classes, including equity, debt, gold, and more.
2. What is the purpose of investing in FoF schemes?
Ans. The primary purpose of investing in FoF schemes is to achieve greater diversification and reduce risk by spreading investments across different mutual funds. They are designed for convenience and simplicity.
3. What are the different types of FoF schemes?
Ans. FoF schemes come in various types, including equity FoFs, debt FoFs, gold FoFs, international FoFs, and balanced FoFs. These types allow investors to access different asset classes through a single fund.
4. Who should consider investing in Fund of Funds (FoF) schemes?
Ans. FoF schemes can be suitable for investors who prefer a simplified way to diversify their investments across various asset classes without directly managing individual mutual funds. They are ideal for those seeking convenience and risk reduction.
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