Fund of Funds

What is Fund of Funds (FoF)?

Fund of Funds is a mutual fund scheme wherein the investor can diversify his/her mutual fund portfolio by investing in various assets. This scheme invests in units of other underlying mutual fund schemes from the same mutual fund house or different mutual fund houses. The factors that will be taken into account while investing in the mutual fund assets will be: the investor’s risk profile, investment goals and returns expectations. Fund of Funds (FoF) scheme helps investors to spread risk over a wider portfolio, thus ensuring lower volatility of funds and aggressive returns.

Investment and Management of Fund of Funds (FoF)

Fund of Funds are actively managed funds. Actively managed funds are those in which the investment expert reallocates underlying funds on a frequent basis, so as to get beneficial outcome from market fluctuations. Fund of Funds is not passively managed since passively managed funds are based on a specific allocation model and this is balanced from time to time. This scheme generally promote investment in affiliated mutual funds which are managed by the same expert. Some investments can be made in funds managed by unaffiliated advisors as well. However, the expense involved in making an investment in unaffiliated mutual funds are higher than that incurred while investing in a fund from an affiliated expert. This is because separate charges will be applicable on the investment management research and the investor will end up paying more to different advisors.

Fees and Charges related to Fund of Funds

While availing the Fund of Funds scheme, a management fee will be charged on services rendered for asset allocation. This fee is nominal compared to that which is charged on a regular fund. Most charges applicable during fund allocation and management is not disclosed during the tenure of operations. It will be disclosed in the fund’s prospectus or annual report only. It is important that the fund is evaluated based on the underlying fund expenses and on fund-level expenses. Both these factors affect the returns on investment adversely.

Advantages of Fund of Funds
  • Through this scheme, investors can buy a share in mutual funds that are not readily available for retail investment.
  • The investment will be diversified, ensuring lower risk and higher returns. Due to this reason, even if an asset is non-performing, the investor will get returns from other funds.
  • Investment is also made in different hedge funds which increases the probability to earn higher return on investment.
Example of Fund of Funds (FoF) Some of the Equity Oriented Fund of Funds available in India are listed below:
  • Kotak Asset Allocator Fund
  • Birla SL Global Real Estate
  • HSBC Managed Sol.- Growth
  • Quantum Equity FOF
  • Sundaram Hybrid Sr-A
  • Birla SL AAF
  • Birla SL 5 STAR MM FoF
  • Principal Global Opportunity fund
  • Birla SL Latin America Equity
  • Sundaram Hybrid Sr-B

GST rate of 18% applicable for all financial services effective July 1, 2017.

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