Funds of Funds (FOFs) usually invest in other. They may be typically required to invest in mutual funds scheme managed by AMC, or invest across other funds or schemes managed by different fund houses.
A fund of funds (FOF)—is also termed a multi-manager investment tool as it invests in other funds. In other words, the portfolio basically consists of other mutual fund schemes.
How a Fund of Funds Works
The strategy behind FOFs aims to achieve appropriate asset allocation and diversification with different mutual fund categories like debt, equity, gold, etc., that form part of your portfolio.
Key Takeaways for an investor FOFs invest in other. Advantages of Investing in Fund of Funds for investors
There are three key benefits of investing in a fund of funds Mutual Fund –
Fund of funds may has a portfolio of different asset class or sector, or fund. Thus it acts as a benefit for diversification and amplifies risk- adjusted returns that is optimized due to the portfolio.
2. Professionally trained managers
Portfolio managers are skilled and qualified individuals that assess and analyze all risk and return factors through detailed investment strategies. This gives investors the benefit of professional management of their investments.
3. Low resource requirements
It is important for every investor to analyze the particular FOF’s mutual funds schemes or any other category.
Few points to keep in mind as an investor
1. Stay invested for the long term: Make sure as investors you must lock-in your funds for at least 3 to 5 years to fetch desired returns. Also, ensure that you are able achieve your liquidity needs through debt mutual funds like liquid funds etc. Mostly FOF s in mutual funds follow a long term strategy, thus it is suggested to have a long term approach.
- Risk-Reward Payoff: Always remember that are subject to volatility due to market fluctuations.
- Expense ratio
Evaluate the expense ratio of the Fund of Funds scheme.
Capital Gain Tax levied on a fund of funds is payable by an investor during redemption of the corpus amount.
Thus, Fund of Funds is a convenient option for investors who do not have the time to select the mutual funds for their portfolio.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.