Fund of Funds: A smarter way of investments

A Fund of Funds (FoF) also known as a multi-manager investment is a type of mutual fund that invests in other mutual fund schemes. This makes FoFs a safer choice that gives the opportunity to invest in top-performing mutual funds.

FoFs offer the convenience of investing through the systematic investment plan (SIP) route like any regular mutual fund. To transact in Exchange Traded Funds, one needs broking and demat accounts. But one can invest in FoFs without any requirement of a demat account making it a smarter choice for all kinds of investors.

FoFs can be both active and passive and are broadly classified as:

• Asset Allocation Funds
• Gold Funds
• International Fund of Funds
• Multi-manager Fund of Funds
• ETF Fund of Funds

“In a country like India, demat holding is still at a nascent stage. For people who have been investing through the mutual fund route for ages, it will take time to graduate to passive investing,” says Umesh Kumar Daila, Head- ETF Sales, Mirae Asset Investment Managers (India) Pvt. Ltd.

“Fund of Funds is the right platform for investors to graduate to passive investing to get some kind of beta exposure into their portfolio. There are benefits like diversification, exposure to ETFs and Index Funds also. FoF is the right route where without having a demat account you can get exposure and diversification with asset allocation and investor-friendly tax treatment,” adds Daila.

Since FoFs invest in different kinds of funds, they help investors achieve diversification and asset allocation at minimal risk. FoFs are managed by highly trained and experienced professional portfolio managers. This ensures that there are accurate market predictions which in turn minimizes the chances of incurring a loss.

“There is no fixed rule on how much (exposure) one should have in equity. Once we have arrived at how much (exposure) should be in equity basis the investor’s profile, the next question comes as to how much should be in the Largecap, Midcap and Smallcap category,” feels Harsh Kumar, Co-Founder and Managing Partner, Zvest Financial Services LLP.

There just cannot be one right approach for investing. However, FoFs give geographical diversification through investment in domestic as well as international funds, which is an added advantage in current times.

On whether to take separate exposures through active Largecap, Midcap funds or a single fund, Harsh Kumar shares his strategy. “When we have to decide on taking a single fund versus multiple funds, we go by three perspectives which become our rules for deciding how to go about it. One is the portfolio at hand, second is the behaviour of the investor and third is the market at that point of time.”

Besides diversification and access to different asset classes, and subclasses within equity, through a single product, FoFs give the benefit of investing small - which sets it apart from other types of investments.

“An investor who wants to invest to the tune of Rs 500 into funds and get exposure into subclasses like Largecap, Midcap and Smallcap category, can invest into FoFs,“ states Daila.

The experts discussed how FoFs differ from Index funds and how risk and return can be mapped in a webinar titled, “Fund of Funds: A smarter way of investments,” conducted by Economictimes.com in association with Mirae Asset Mutual Funds.

The exclusive session elaborated various strategies on the basis of which allocation is done in underlying ETFs in FoF products. The expert panel also deliberated on things investors need to consider before choosing a FoF. Click here to watch the full session.