Fund of funds Mutual Funds invest in other schemes of Mutual Fund, each specializing in their way of investing in a particular asset or a sector. A Fund of Funds Mutual Fund can have different funds of the same asset class such as Equity or can have funds investing in other asset classes such as debt and gold. They seek to diversify and balance the risk across different asset classes and optimize returns.
So the advantage of fund of Funds is that by investing in just one Fund of Funds Mutual fund Scheme you gain access to multiple funds. It may sound easy and you might wonder that you too can do it all by yourself. But when it comes to investing professionally, the fund manager takes a lot of factors into account which we as retail investors don’t. They ensure that there is no overlapping of underlying portfolios when investing in multiple mutual funds. They check if the respective schemes are classified as Large-cap and non- large cap. So in a nutshell, a lot of research and analysis is done with the respective fund houses before investing.
Another advantage a Fund of Funds vs a mutual fund can offer is, it comes with indexation benefits. Fund of Funds Mutual Funds are treated as debt funds and are subjected to indexation.
Indexation is a tool that applies to long-term investments. It helps an investor to adjust inflation while gauging the returns of the invested amount.
As inflation is gradually raising, what’s worth Rs. 1000 could be worth Rs.1100 sooner in near future. Thus, inflation is reducing the purchasing power of our money. The same amount of money will be enabling the investor to buy lesser and lesser goods.
In the case of Fund of Funds Mutual Fund, we arrive at capital gains after indexing the purchase price of the investment. When subjected to indexation, it lowers the long-term capital gains tax which brings down your taxable income. Indexation is also a reason why Fund of funds is looked upon as a preferred investment option.
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.