As the name suggests, a Fund of Funds (FOF) is a type of mutual fund that invests in other mutual fund schemes instead of investing directly in stocks, bonds, or securities.
A Fund of Funds may invest in schemes from the same fund house or from different fund houses.
Depending on its investment strategy, an FOF can invest in equity funds, debt funds, international funds, ETFs, or other asset classes.
According to taxation guidelines, an FOF may be classified as an equity-oriented fund if it invests at least 90% of its assets in equity mutual funds that themselves invest a minimum of 90% of their assets in domestic equities.
If these conditions are not fulfilled, the FOF is generally treated as a non-equity-oriented fund for taxation purposes.
For example, the ICICI Prudential Thematic Advantage Fund is a Fund of Funds that invests in multiple thematic mutual fund schemes.
Benefits of Investing in a Fund of Funds (FOF)
Diversification
FOFs provide diversification by investing across multiple mutual fund schemes, which may help reduce the overall investment risk.
Professional Management
The portfolio allocation and selection of underlying mutual fund schemes are managed by professional fund managers and research teams.
Ease of Investing
Like other mutual fund schemes, FOFs can be invested in online through SIP or lump sum investments.
Exposure to Multiple Themes or Asset Classes
FOFs can provide investors exposure to different sectors, themes, asset classes, or international markets through a single investment.
Drawbacks of Investing in a Fund of Funds (FOF)
Higher Expense Ratios
FOFs may have relatively higher costs because investors indirectly pay the expense ratios of both the FOF and the underlying mutual fund schemes.
Over-Diversification
In some cases, excessive diversification may reduce the overall impact of high-performing investments on the portfolio returns.
Before investing, investors should understand that Fund of Funds are also subject to market risks, and returns are not guaranteed.
To learn more about mutual funds in a simple and beginner-friendly way, explore our Mutual Fund Investor Hub, where we have answered 100+ mutual fund questions in an easy and well-structured format.
Important Links:
1. What are international mutual funds?
2. What is an ETF (Exchange-Traded Fund)?
3. What is an ELSS (Equity-Linked Savings Scheme)?
5. For real life investing stories, check our Real Life Investing Experience section.
