What is a Fund of Fund (FoF)?

A Fund of funds (FoF) in mutual funds pools investors` resources and invests them in various other mutual funds. Fund of fund mutual funds may have varying degrees of risk, however, their primary objective is to diversify an investor`s portfolio across different funds. There are several types of FoF in mutual funds:

• Bond Fund of Fund:

  Bond fund of funds invest in other bond schemes. These bond schemes invest in securities such as treasury bills, commercial papers, certificates of deposit etc. Bond fund of funds may be a moderately risky investment option. These funds may be suitable for investors seeking diversification across different debt schemes.

• Asset Allocation Fund of Funds:

  These FoF mutual funds may invest in various funds including debt funds, equity funds, gold funds etc. Diversification across asset classes may potentially help reduce risk and generate returns. Investors can choose between three different plans, namely, conservative, moderate and aggressive based on their risk tolerance and preferred asset allocation.

  - Asset Allocation Fund of Funds - Conservative Plan: This FoF fund is mandated to invest at least 35% of its assets in debt and/or arbitrage funds. A maximum of 90% can be invested in debt funds. To diversify the fund`s portfolio, it is mandated to invest 10%-30% of its assets in equity funds. This asset allocation may reduce the risk in the fund, making it suitable for risk-averse investors.

  - Asset Allocation Fund of Funds - Moderate Plan: This fund of funds in mutual funds may be suitable for investors with a moderate risk appetite. The fund is mandated to invest between 10%-75% of its assets in debt funds. At least 25% of the fund`s assets should be invested in equity funds. A maximum of 55% of the fund`s assets can be allocated to equity funds.

  - Asset Allocation Fund of Funds - Aggressive Plan: This fund of fund may be suitable for investors with a high-risk appetite, seeking potentially higher returns. The fund is mandated to invest at least 40% of its assets in equity funds. A maximum of 80% of the fund can be invested in equity funds. The fund is allowed to invest up to 40% of its assets in debt funds.

• International Fund of Funds:

  These fund of fund mutual funds allow investors to diversify geographically by investing in international mutual funds. A majority of the fund`s corpus must be invested in foreign mutual funds. Investors seeking diversification of their assets and seeking to benefit from the potential performance of an international market may potentially benefit from this scheme. However, international fund of funds may be very risky investments. Investments in the international market may be vulnerable to fluctuations in market conditions and exchange rates. Moreover, socio-political factors may affect international investments.

• Multi-Manager Fund of Funds:

  These fund of funds are managed by multiple portfolio managers. Each portfolio manager may deal with a specific asset within the fund.

Taxation of Fund of funds depends on the asset allocation. Debt-oriented fund of funds are taxed similarly to debt funds. STCG tax is levied on units held for less than three years based on the investor`s income tax slab. LTCG tax is levied on units held for longer than three years at 20% with indexation benefits.

Taxation of fund of funds that are classified as equity funds is subject to STCG tax investments redeemed within one year at 15%. Equity-oriented FoF mutual funds are subject to LTCG on units redeemed after a year at 10%.

Who Should Invest in Fund of Funds Mutual Funds?

Fund of funds in mutual funds have varying levels of risk. Bond funds of funds may be a low-to-moderate risk investment option and may generate short to medium-term optimal returns. International fund of funds may be vulnerable to several risks and may be a high-risk investment. Investors must analyse the risk level of the scheme before investing.

Fund of Funds (FoF) may be a suitable investment option for investors seeking to diversify their portfolio across different asset classes by investing in different mutual fund schemes. Investors with minimal knowledge or beginner investors may potentially benefit by investing in fund of funds mutual funds as they have a diversified portfolio.

FAQs

• What is the definition of fund of funds?

  Fund of funds in mutual funds are a type of investment scheme that pools their funds and invests in units of other mutual funds, across varying asset classes.

 
• How to invest in a fund of funds in India?

  Investors can invest in a fund of funds in India by visiting our website. Identify the fund of fund scheme you wish to invest in, click the “Invest Now” button and fill in the required details.

 
• Are fund of funds returns high?

  The returns of a fund of funds are highly dependent on the asset allocation and investment strategy of the fund. FoF mutual funds that invest a significant amount of their corpus in equities may be better suited for wealth creation. However, returns on any mutual fund investment cannot be predicted and are dependent on market conditions.

 
• Are fund of funds schemes safe?

  The risk level of a fund of fund scheme is dependent on the asset allocation and investment strategy. However, an international fund of funds may be a riskier investment as compared to a domestic fund of funds. International fund of funds may be vulnerable to market risks, exchange rate fluctuations and global socio-economic circumstances.

 
• What is the taxation on fund of funds in India?

  Taxation of fund of funds varies based on the asset allocation. Debt-oriented fund of funds are subject to STCG tax and LTCG tax similar to debt funds. Equity-oriented fund of funds are subject to taxation similar to equity funds.

 
• What are the types of fund of funds in India?

  Asset allocation fund of fund, international fund of fund, multi-manager fund of fund, bond fund of fund are some of the different types FoF mutual funds.