uTrade Algos
Table of Contents
Table of Contents
Consider that you have numerous Indian destinations on your itinerary for a visit in the coming months. You must reserve a lodging in these various cities if you want to have a good stay. You may conveniently reserve your accommodations using an aggregator portal rather than making many reservations through different websites. Additionally, you may quickly cancel or reschedule the booking through a single platform. Thus, using this one platform gives you access to a variety of hotels. The concept of a Fund of Funds (FOF) is comparable.
In this post, we’ll examine what a fund of funds (FOF) , explain how it works, and discuss its benefits and drawbacks so you can decide whether investing in them is a good idea for you.
What is a Fund of Funds (FOF)?
Fund of funds meaning is a mutual fund that uses its pool of resources to invest in many other types of mutual funds in the market. As an alternative, this Mutual Fund also allows for the purchase of hedge funds.
A pool of funds MFs have portfolios with varied levels of risk, depending on the manager’s primary objective. If the portfolio manager’s main goal is to maximize returns, then mutual funds with larger NAVs will be chosen, even when they come with a higher level of risk. However, if stability is the main goal, the resulting pool of financial resources will be used to buy low-risk assets.
Depending on the asset management company’s discretion, these mutual funds may be utilized to invest in both local and foreign funds. This broadens the fund of funds’ diversity. The fact that these mutual funds are managed by skilled, experienced professionals is their defining quality. This helps to some extent assure correct market projections, reducing the likelihood of suffering a loss. I hope with this explanation fund of funds meaning is clear.
How Does FOF Function?
The fund of funds (FOF) approach makes investments across a range of fund categories and bundles them into a single portfolio in order to achieve wide diversification and proper asset allocation.
There are several types of FOFs, and each type operates according to a unique investing strategy. A FOF can be set up as a hedge fund, private equity firm, mutual fund, or investment trust. The FOF may be restricted, which means it only makes investments in portfolios run by one investment firm. The FOF can also be unconstrained, which would enable it to invest in outside funds overseen by managers from other companies.
Fund of Funds Types
The top fund of funds list in the nation is made up of the following:
Funds for asset allocation
These funds are made up of a variety of assets, including stock, debt, precious metals, and other securities. Due to the generally stable assets in the portfolio, this enables asset allocation funds to achieve significant returns through the best performing instrument while lowering their risk.
Gold investment funds
investing in several mutual funds, which specialize in trading gold-related products. Depending on the asset management firm in question, the fund of funds that falls under this category may have a portfolio that includes mutual funds or the actual gold trading enterprises.
International pool of funding
The international fund of funds focuses on mutual funds that operate abroad. This gives investors the opportunity to possibly earn better returns by investing in the best-performing equities and bonds of the relevant nation.
Multi Manager FOF
The most prevalent variety of mutual funds on the market is this one. Such a fund’s asset base is made up of a variety of professionally managed mutual funds, each with a unique portfolio concentration. Typically, a multi-manager fund of funds includes many portfolio managers, each of whom is in charge of a different type of asset that is contained in the mutual fund.
Fund of Funds ETF
An extremely common financial vehicle in the nation is the fund of funds, which includes exchange-traded funds in their portfolio. It is easier to invest in an ETF through a fund of funds than it is to do so directly. This is because investing in an ETF fund of funds has no restrictions, but buying ETFs requires a Demat trading account.
ETFs, on the other hand, have a little greater risk factor since they are traded like shares on the stock market, making these funds more vulnerable to market volatility.
Who should invest in a fund of funds?
The top fund of funds invests in a diverse portfolio with low risk in order to optimise rewards. Such a Mutual Fund can be chosen by those who have limited financial resources that they can spare over a longer time frame. Access to high-value funds is also ensured because the portfolio of these funds includes a variety of Mutual Funds.
Investors with relatively limited resources and little demand for liquidity should ideally be able to select the best fund of funds on the market. They may thereby get maximum results with little risk.
Benefits of Fund of Funds (FOFs)
Let’s now examine some of the main benefits of FOFs.
Simple Rebalance
Rebalancing is essential when it comes to maintaining your financial portfolio. It could be necessary for you to sell certain investments and acquire others in order to rebalance your portfolio. If you sell investments in this situation, you can be obliged to pay capital gains tax.
However, when portfolio rebalancing transactions are made by the various funds that make up the FOF, no capital gains tax is due.
Diversification
The main benefit of FoFs is that they allow investors to access a variety of mutual funds with various investment objectives with just one investment.
The various fund managers’ investment strategies
FOFs invest in a variety of domestic and foreign mutual funds.Investors in FOF have access to the advantages of investing in a portfolio that is overseen by many fund managers and their research teams. For instance, International FOF enables you to have access to specialists in a certain industry niche.
Convenience of Gold and Foreign Market Investing
Investment in multinational corporations is also made simpler by international FOFs. To invest in stocks of global corporations, you do not need to open a separate account with a different intermediary. Through overseas funds, investing may be started right away. Similarly, paperless gold investments may be made easily using gold ETFs.
Drawbacks of FOF
There are several drawbacks to FOF, just like with anything else. Let’s examine some of the issues with FoF:
Unwillingness to Change
The fact that investors cannot pick the mutual funds or investing approach a fund manager uses is a significant drawback of FOF. If you don’t like one fund, your only choice is to stay involved or, if you’ve already invested, to sell your money. As a result, you instantly have exposure to the seven mutual funds that the fund manager has invested in.
Higher Expense Ratio
FOFs occasionally could have a higher expenditure ratio. The annual fee that fund companies charge to manage the investments is known as the Total Expense Ratio (TER). It is determined as a proportion of the fund’s overall assets. Additionally, SEBI has divided the FoFs based on the underlying schemes and restricted the expense ratio that these funds may charge.
Portfolio Duplication is a Possibility
FoFs may have exposure to the same stock or debt asset across many funds since they invest in various mutual funds. Due to portfolio duplication brought on by this circumstance, diversity may be limited.
Conclusion
By aggregating resources into a single fund that subsequently invests in a range of different underlying funds, Fund of Funds (FOF) functions as a strategic investment vehicle that gives expertise and diversification to investors.
For investors looking for a more practical approach to access several investing options without actively managing individual assets, FOFs might be a compelling choice. Moreover, use trading platforms like Share India to invest funds safely and benefit greatly. For both novice and seasoned stock traders, it is one of the most safe, cutting-edge, and dependable trading platforms available.