We have heard of mutual funds but what are fund of funds and how are they different from mutual funds. In FoF, an investor instead of directly investing in shares, invests in fund that further invests in other mutual funds. This is also sometimes referred as multi-manager investment.
Fund of funds are considered to be a boon for the investors who struggle to choose from various asset classes of investments. Listed below are few pointers one should know before about before investing:
There are several FoF in India and some of them also offer products with international exposure. These schemes invest in international funds that are registered in another country. These overseas funds, in turn, own equities in companies that are publicly traded in other countries. This allows Indian investors to acquire cost-effective exposure to stocks such as Alphabet, Apple, Microsoft Corp, and Tesla.
Benefit of Taxation
Even if the fund invests in equity mutual fund schemes, most FoFs are taxed like any other debt mutual fund scheme. If an FoF invests more than 90% of its assets in equity exchange-traded funds, it will be subject to equity taxation.
Beware of expense ratio
Compared to the regular mutual fund expense ratio, the FoF expense ratio is higher. The justification is that the fund manager takes a higher risk to choose the right asset. You can check the expense ratio of mutual funds at 5paisa.com and then make an investment decision.
Multi-asset exposure with low resource
A person with limited financial means can readily invest in the best fund of funds available to increase their profits.
Types of Fund of Funds
FoFs investing in international funds are not the only FoFs. There are various types of FoFs that include ETF FoFs, domestic FoFs, Gold FoFs, amongst others.
The risk of volatility persists
Despite the risk element being reduced thanks to the top fund of funds’ strong management and diversified investments, these funds are always exposed to market volatility.
Start with a small amount
FoFs have the advantage of investing small amounts of money, which sets them apart from other types of investments. FoFs are suitable for investors who need to start with Rs 500 in funds and gain exposure to subcategories such as large-cap, mid-cap, and small-cap, as well as other commodities. Mutual fund investments can be made directly or through platforms such as 5paisa.com.
Analyse your risk-taking capacity
Because FOFs are mutual funds, investors should examine their risk tolerance and the amount of money they intend to invest before investing.
Never forget your goals
As an investor, they should remember and analyse the goals and objectives of their investments. If they lose track, it might impact their overall portfolio.
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