What are funds of funds?

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A fund of funds (FOF) is a pooled investment vehicle that invests in other types of funds. It is also known as multi-manager investment. In other words, its portfolio includes many underlying portfolios from other funds. These holdings take the place of direct investments in bonds, stocks, and other types of securities.

Typically, FOFs invest in other mutual funds or hedge funds. They are often classed as “fettered,” which means they can only invest in funds managed by the FOF’s managing company, or “unfettered,” which means they can invest in funds from all across the market.

How a Fund of Funds Operates

The fund of funds (FOF) approach seeks broad diversification and optimal asset allocation by investing in a variety of fund types that are all wrapped into a single portfolio.

There are various types of FOFs, each of which operates on a distinct investment scheme. A FOF might be organised as a mutual fund, hedge fund, private equity firm, or investment trust. The FOF may be constrained, which means that it exclusively invests in portfolios managed by a single investment firm. Alternatively, the FOF can be unrestricted, allowing it to invest in external funds managed by other firms’ managers.

Fund of Funds Types (FoFs)

Funds of Funds can be of several forms, depending on the fund’s investing purpose. The following are the various types of FOFs:

Asset allocators, also known as multi-asset funds, invest in a variety of assets, including stocks, bonds, and commodities such as gold.

These types of Fund of Funds invest in other funds in order to diversify their portfolio across asset classes. They could, for example, invest in one mutual fund scheme that focuses on stocks, one debt fund scheme that focuses on bonds, and one gold fund plan. This strategy seeks to provide exposure to a wide range of asset classes, including equities, bonds, gold, and other commodities.

The FoF approach makes it easier to manage a multi-asset portfolio because the fund manager does not have to pick up assets from different asset classes individually. The fund management only needs to choose one or two funds for each asset class, while the stock selection is handled by the underlying scheme’s fund manager.

  • International Fund for Mutual Assistance

International FOFs put their money into International Funds, which put their money into worldwide firms. As a result, investors in these funds gain indirect exposure to huge global corporations without having to open a trading account with an offshore broker. Furthermore, global exposure ensures a healthy level of diversification.

In this instance, the fund manager of the FOF can also draw on the experience of the fund manager of the foreign fund, who is knowledgeable about investing in the securities of the specific country.

  • ETF-Based Fund of Funds

ETF FOFs invest in Exchange Traded Funds (ETFs), which are a collection of investment vehicles that replicate a larger market index such as the NIFTY 50 or the BSE SENSEX. The movement of a benchmark index assists us in understanding general market mood and is regarded as a vital gauge of overall market sentiment.

To invest in ETFs, however, a trading and Demat account are required. Fund houses create FOFs so that investors without a Demat account can simply invest in their ETFs via the FOFs.

Bharat Bond FOF by Edelweiss Mutual Fund, for example, invests mostly in Bharat Bond ETF units, whereas Mirae Asset NYSE FANG+ ETF Fund of fund invests primarily in Mirae Asset NYSE FANG+ ETF.

  • Gold Mutual Fund of Funds

Investors can purchase gold ETF units to invest in gold. These gold ETFs invest in gold that is 99.5 per cent pure. However, some investors may be unable to invest in Gold ETFs due to a lack of a Demat account. This is where Gold FOFs come in: they invest in gold ETFs. ICICI Prudential Regular Gold Savings Fund (FOF), for example, invests in ICICI Prudential Gold ETF.

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