Fund of Funds and its Advantages

A Fund of Fund means a mutual fund scheme that invests in other mutual fund schemes. The fund manager invests in other mutual funds instead of directly investing in equities or bonds. The portfolio is catered for investors with different risk profiles and financial goals. The Fund of Funds offers such benefits that the investors gain from the diversification as a result of investing in various fund categories.

The most sought after Fund of Funds in India are:

Multi Asset allocation Fund of funds are mutual funds that invest in and even other asset classes such as gold, equity, debt and commodities.
Gold Fund of Funds are fund of funds that have underlying investments in Gold ETFs
International Fund of funds are investments in mutual funds that comprise bonds and shares of global companies.
Fund of Fund Benefits

In case of Fund of Funds, taxation levied on a fund of funds are payable by an investor, only when the invested amount is redeemed with capital gain. However, during recovery, capital gains are subjected to tax deductions in India, depending upon the annual income of the investor and the time period of investment. There is no taxation on fund of funds if rebalance of scheme assets is done by fund manager of the scheme.

Easier to Handle
The investor tracks only one NAV and one folio. This makes managing the reduced number of funds much easier.

Competent Management Services
As Fund of Funds in India are managed by competent professionals who carry out a thorough market analysis and research based on intricate investment strategies to generate alpha for the investors.

Expense Ratio
In addition to the general management and administrative fees, Fund of Funds bears an additional expense of the underlying funds.

Disadvantages of Fund of Funds

The basic meaning of Fund of Funds is that the mutual fund invests in many funds that further invest in several securities. It is quite possible that the Fund of Funds, may own the same stocks and securities through different funds. This reduces the potential for diversification.
Fund of funds is a long-term investment. As an investor, make sure that you can afford to stay invested in these funds for a considerable period before investing in this type of mutual fund.
Fund of funds also cannot escape volatility due to market fluctuations.
Fund of Funds in India is built on the principle of convenience out of single but diversified investment plans. As an informed investor, you must decide the advantages and disadvantages of this scheme. Choose a fund and know your risk tolerance, financial goals, and tax implications, before making an informed decision.