Fund of funds

Fund of funds
Source: Tavaga

A fund of funds (FoF) is an investment fund that does not directly invest in financial securities but invests in other investment funds, such as MFs, ETFs, and private equity funds. FoF pools investors’ money, which is then actively managed by a portfolio manager.

How Fund of Fund works?

FoF schemes offer the investor a diversification benefit by investing in other schemes, reducing a direct impact of risk in the underlying securities. They help investors who want to gain access to a range of different asset classes. 

There are various types of FOFs, and each type operates according to a unique investing strategy. A FOF can be set up as a hedge fund, a private equity firm, a mutual fund, or an investment trust. The FOF may be restrained, which means it only makes investments in portfolios run by one investment firm. As an alternative, the FOF can be unrestricted, allowing it to invest in outside funds managed by managers from other businesses.

FoFs have a high expense ratio due to individual expenses of different funds that are a part of it. Investors should assess the returns accordingly.

Suitability of fund of funds

It is suitable for small investors and those who don’t want to take high risk. Also, investors with limited amounts of funds can invest in it to have a diversified portfolio and advantages of each fund. 

Taxation scheme of FOF

Currently, FoFs are considered as non-equity oriented funds. When a FoF invests in equity securities through equity-oriented funds, Dividend distribution tax is levied when the company distributes dividends as well as when FoFs distributes dividends to its unitholders. 

Types of Fund of Funds:-

Out of the various type of FOFs available, some of them are

  1. Fund of hedge fund
  2. Gold FOFs
  3. Asset Allocation Funds
  4. Fund of venture capital
  5. ETF FOFs
  6. Fund that invest in international markets

Top Fund of Funds in India

  1. Kotak Gold Funds
  2. Axis Gold Funds
  3. ICICI Prudential Regular Gold Savings Fund
  4. HDFC Gold Funds
  5. Nippon India Gold Savings funds

Note:- This ranking is based on the returns that these funds had generated in the past one year. The returns may vary in future.