Are you confused about what is Fund of Funds? Read this

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As investors, we all want access to developing technologies and large innovative corporations that contribute to growth. Mutual funds continue to be the most cost-effective option to invest in international equities.

Global exposure mutual funds are mostly fund of funds (FoFs), offered by an Indian asset management company (AMC) to invest in an international mutual fund. Simply put, global FoFs in India are funds that invest in units of global funds or exchange-traded funds (ETFs) with a geographic mandate.

How does taking a stake in different mutual funds work?

Instead of investing directly in shares of globally listed companies, FoFs provide an easier and less risky way for investors to invest in foreign markets. Rather than investing directly in equities or bonds, the manager of this fund manages a portfolio of other mutual funds.

A particular FoF may invest in schemes managed by the same fund house or by another fund house. The portfolio is constructed to meet the needs of investors with a range of risk tolerances and financial objectives. As a result of investing in various fund categories, investors gain the potential to benefit from diversification.

The benefits are obvious: You get to ride high-growth stories regardless of your geographic location. Additionally, it assists in mitigating country-specific risks. Further, it exposes investors indirectly to appreciating currencies, as the rupee has depreciated against developed countries’ currencies over the years due to the inflation gap.

Who can invest?

The Fund of Funds is an excellent choice for small investors who are averse to taking on additional risk. Diversification of investments helps to mitigate risk. This is also an excellent investment vehicle for an individual with a limited monthly investment budget. Additionally, individuals with a five-year or longer investment horizon may consider investing in this fund.

Points to note

-Investors can use this scheme to purchase shares in mutual funds that are not generally available for retail investing.

-Diversification of the investment will provide lesser risk and higher profits. As a result, even if an asset is non-performing, the investor will still get returns on other funds.

-Additionally, investments are made in various hedge funds, which raises the likelihood of earning a better return on investment.

– When availing of the Fund of Funds plan, a management fee will be charged for asset allocation services delivered. This fee is negligible in comparison to the one levied on a regular fund.