Suppose you invest in a mutual fund scheme and the fund manager instead of buying stocks or debt securities invests the money in another mutual fund scheme. In such a case, you will hold a fund of fund (FoF) scheme and is available to investors in addition to regular funds.
The fund manager of FoF invests your money to buy units of other mutual funds schemes. FoF can be of different types – From being a gold FoF, a FoF investing in international ETFs, multi-manager FoF to a multi-asset FoF.
But, does FoF make sense and under what circumstances should one consider investing in them? Anup Bansal, Chief Investment Officer, Scripbox provides a snapshot of the situations when they make sense and when they do not make sense to an investor.
An investor who has a passive outlook to the investment portfolio can choose to opt for a Fund of fund in his portfolio at the asset allocation level, and/or subsequently at the product level.
A FoF version of an ETF (country or commodity based) may turn out better than buying the ETF itself as the price of purchase will be the NAV and that will be closer to the benchmark value at the end of day.
A fund of funds also makes sense when the investable theme is a high-net-worth product and illiquid and where there is a high investment limit for investing at the constituent product levels.
Does not make sense
An asset allocation fund of funds does not make much sense in a India specific scenario as it does not provide the flexibility which an overall asset allocation structure combined with a fund selection layer may provide.
Even if the FoF is a passive allocation from the viewpoint of the investor, the fund manager of the FoF may take active calls on the allocation to each asset class and if the portfolio has multiple FoF’s, the asset allocation at the portfolio level may have a significant active risk.
An equity fund of funds does not make sense as it will suffer due to the debt fund like tax treatment despite equity having a 10% long term and 15% short term tax treatment.