On the topic of mutual funds investment in India, investors often get a variety of choices. One option that usually gets ignored is a Fund of Funds (FoF). But what does it really mean to the investors, and can it be a worthy place in your portfolio?
What is a Fund of Funds (FoF)?
A Fund of Funds (FoF) is a mutual fund that invests in other mutual funds rather than directly going for stocks or bonds. Here’s how it really works:
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Rather than handling a group of stocks or bonds directly, the fund manager picks a mix of other mutual funds.
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This means your invested money is distributed over various fund companies, investment types, and approaches.
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It is like having a mixed portfolio within a large mix of funds.
Know more: AMFI’s explanation of Fund of Funds
Types of FoF in India
Fund of Funds can concentrate on different types of investment goals related to finance:
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Equity FoFs: Invests your money mainly in equity mutual funds.
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Debt FoFs: Put money in different debt mutual funds.
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International FoFs: They provide reach to global markets by investing your money in top international funds.
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ETF-based FoFs: They invest your money in various exchange-traded funds for index-based investment.
Benefits of Fund of Funds
FoFs can be exciting investment options for both beginners and experienced investors. Here are benefits of choosing FoFs:
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Diversification: You get immediate diversification of your funds across different funds, fund managers, and strategies.
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Professional Management: Expert fund managers pick which fund to add to your portfolio based on performance and market situations.
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Easy International Exposure: Some FoFs give you entry to international markets without the need of a separate overseas account.
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Low Minimum Investment: You don’t have to invest with big amounts to get diversified exposure.
Things to Watch Out For
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Double Expenses: You need to pay expense ratios for the FoF and the fundamental funds both.
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Taxation: Apart from international FoFs, most funds are taxed like debt funds, even if they invest in equity, which means a higher tax on short-term gains.
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Overlapping Holdings: From time to time, FoFs may keep funds that own similar types of stocks, which reduces the benefit of diversification.
SEBI’s Circular on Fund of Funds Regulation
Are FoFs Worth It?
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If you want a single-point diversified portfolio but don’t have the time or knowledge about picking the individual funds.
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If you are searching for international involvement with comfort.
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If you are okay with paying a little higher cost for the convenience.
On the other hand, if you prefer direct control over your money, low expenses, and the understanding of how to mix the funds on your own, then a FoF may not be required.
Final Thoughts
If you are looking for mutual funds investment in India, then a Fund of Fund can be an easier way to diversify. Just make sure to do the comparison of costs and make sure it suits your financial goals.
If you are thinking about the best mutual fund portfolio strategy for 2025 or how to choose the right mutual fund in India, then talking to a trusted SEBI-registered financial advisor can help you find the ideal mix of your needs.