NEWSLETTER DATED 17-08-2022

KNOWLEDGE CENTER

 

What is funds of funds?

Fund of fund is a mutual fund which utilizes its pool of resources to invest various other kind of mutual fund available in the market. Alternatively, investment in hedge funds can also be made via this mutual fund.

Fund of funds MFs have portfolios of varying degree of risks, depending upon the main aim of the manager. If the primary target of the portfolio manager is to earn the highest yield possible, the mutual fund having higher NAV will be targeted, even though it is associated with a higher degree of risk. However, if the primary aim is stability, low-risk instrument will be acquired using the pool of financial resources obtained.

These mutual funds can be used to invest in both in domestic as well as international funds, as per the discretion of the asset management company. This increases the diversification of the fund of funds.

The essential characteristics of the mutual funds is that they are maintained by highly trained professional portfolio managers. This ensures accurate market predictions to a certain extent, minimizing the chances of incurring a loss.

 

Types of funds of funds

The following comprises the top fund of fund lists-

  • Asset Allocation funds – these funds consist of a diverse asset pool – with securities comprising of equity, debt instruments, precious metals, etc. . This allow asset allocation fund to generate high returns through the best performing instrument, a reduced risk level guaranteed by the relatively stable securities present in the portfolio.

 

  • Gold funds – investing in different Mutual funds, primarily trading in gold securities are gold funds. Fund of fund belonging to this category can have a portfolio of mutual fund or the gold trading company themselves, depending upon the concerned asset management company.

 

  • International Fund of funds- Mutual fund operating in foreign countries are targeted by international fund of funds. This allow investors to potentially yield higher returns through the best-performing stocks and bond respective country.

 

  • Multi-manager of funds- this is most common type of funds of funds mutual funds available in the market. The asset base of such a fund comprises of various professionally managed Mutual funds, all of which have a different portfolio concentration. A Multi-manager fund of funds usually has multiple portfolio managers, each with a specific asset present in the mutual fund.

 

  • ETF Funds of Funds- funds of funds comprising exchange-traded funds in their portfolio is a popular investment tool in the country. Investing in an ETF through funds of funds is more accessible than a direct investment in this instrument. This is because ETFs require Demat trading account while investing in ETF funds of funds have no limitations.

However, ETFs have a slightly higher risk factor associated with them as they are traded like shares in the stock market, making these fund of funds more susceptible to the volatility market.

 

 

Advantages of Investing in Funds of Funds-

There are various benefits of investing in a fund of funds Mutual fund

 

  • Diversification – Funds of Funds target various best performing Mutual funds in the market, each specializing in a particular asset or sector of fund. This ensures gains through diversification, as both returns and risks are optimized due to underlying portfolio variety.

 

  • Professionally trained managers- Funds of Funds is managed by highly trained people with years of experience. Proper analysis and calculated market predictions made by such portfolio managers ensure high yields through intricate investment strategies.

 

  • Low resources requirements- an individual with limited financial resources can easily invest in top funds of funds available to earn higher profits. Monthly investment schemes can also be availed while choosing a funds of funds to invest in.
  • Access: Fund of Funds enables investor to access different asset class such as gold, equity, debt or access to distinct traits of same asset class such as within equity take exposure in large-caps, mid-caps and small caps. Such “n” numbers of schemes can be packaged and investor can get access to such different flavours

 

  • Small Investment: Suppose an investor has only Rs. 500/- to invest and he wants to get exposure to different market cap segment within Equity. In such cases an investor can invest a in fund of funds which invests in different market cap segment.

 

  • Exposure to ETFs: An investor can take exposure to ETFs in case he/she doesn’t have a DEMAT account via fund of funds of which invests in ETFs. An investor can also do SIP in ETF via the fund of funds route. FOF in such cases will also take care of the investor concern about liquidity on exchange and cost associated with brokerage, spread on exchange etc.

 

  • Reduce tax incidents: Fund of Funds which does asset allocation will absorb the tax implication involved while buying and selling the units of mutual funds and the overall tax impact for the investor will be lower.

 

  • Equity Taxation Benefit: A Fund of Funds will get equity taxation benefit if it invests at least 90% of its total proceed in units of mutual funds which are traded on recognized stock exchange such as ETFs and in turn such units invests at least 90% of its total proceed in equity shares of domestic companies listed on a recognized stock exchange.

 

Limitations of funds of funds

  • Expense ratio – expense ratio to manage a funds of funds mutual funds are higher than standard mutual funds, as it has a higher managing expense. Added expenses include primarily choosing the right asset to invest in, which keeps on fluctuating periodically. This expense amount to a substantial amount, and is deducted from the annual returns generated by the asset management company.

 

  • Tax – Tax levied on a fund of funds are payable by an investor, only during redemption of the principal amount. However, during recovery, both short-term and long –term capital gains are subjected to tax deductions, depending upon the annual income of the investor and the time period of investment. It should be noted that the dividend received on the investment is not taxable, as the burden is borne by the issuing fund house.

 

 

 

MUTUAL FUND SIP RETURNS

 

 

 

 

 

CATEGORY AVERAGE RETURNS

 

 

 

 

 

CA JAYESH GANDHI

 Disclaimer: This is an informative document and opinions expressed in it are our own and not any advice. We are AMFI registered MUTUAL FUNDS DISTRIBUTOR.

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