Gone are the days when investing in shares was considered as the only form of investment in stock markets. Today there are multiple investment products that can be used by the investors depending on their risk appetite, returns expectations, investment budget, etc. One of the many investment products available to investors includes fund of funds. This is a unique investment product with many advantages for the average investors.
Given below are the details related to the investment in a fund of funds which can help the investors make a sound investment decision.
Fund of funds can be considered as the mother investment fund. This is a mutual fund scheme that invests in other mutual funds instead of individual stocks or securities. The fund manager in this case has a portfolio of other mutual funds. The fund can be designed or tailored as per the objective of the fund This fund can be formed out of investment in schemes of the same fund house or a different fund house within the country or outside. Investors can get huge diversification out of such funds as an investment in different mutual funds will provide exposure to not only different stocks but also other instruments like debt or other securities as well as different markets, sectors, and industries.
Investment in a fund of funds provides the investor with access to multiple funds under a single roof. This gives them the opportunity to maximize their returns at relatively lower risk and lower investment budgets. Investors having a low-risk appetite can find such funds to be ideal to include in their portfolio so they can get good returns at minimal risk.
There are many types of fund of funds that investors can choose from to invest in this segment. The details of the same are provided below.
These funds have a diverse pool of assets like equity, debt, gold, etc. This spread of assets provides the investors with huge diversity which will eventually lead to relatively stable returns at lower risk and cost.
International Fund of funds invests in mutual funds from foreign countries. This ensures that investors get access to the best funds from even the international market.
ETF fund of funds as the name suggests is a mutual fund that invests in various ETFs. This makes investing in ETFs more accessible to investors as they do not need to open a Demat account for such investment. However, being directly associated or dependent on stocks for their returns, the risk factor in the case of ETF fund of funds is relatively higher.
Gold funds are a portfolio of investments in gold securities or gold trading companies as per the guidelines of the asset management companies managing these gold funds. It provides the benefit of investment in gold at the same time avoiding the risks associated with an investment in physical gold.
This is the most common type of fund of funds in the market. The portfolio consists of different mutual funds that are professionally managed and have further diverse assets or industry concentration. The fund is managed by multiple portfolio managers that are responsible for their specific asset class and fund performance.
Fund of funds have provided easy access to investors to maximize their returns not only at national but international levels. There are many advantages of these funds which are discussed below.
The fund is managed by professional fund managers that have expertise in understanding various asset classes and can manage such assets to maximize the returns of the investors.
Fund of funds provides the investors with access to the top mutual funds nationally and internationally. This access is available at a relatively lower investment cost. Hence, investors with lower investment budgets can also avail of this instrument to maximize their returns by making small monthly investments as well.
Diversification is the inherent benefit of investing in mutual funds. Funds of funds invest in multiple mutual funds so the benefit of diversification is further enhanced. The returns can be maximized at a lower risk factor.
A diversified portfolio ensures that the risk of investment is significantly reduced for the investors. This fund is therefore one of the best investment opportunities for investors with low-risk appetite.
The expertise of professional fund managers along with the inherent features of diversification and low risk provide the investors with the potential to earn higher returns on their investment. The lower cost of investment further attributes to an increase in potential returns.
Although there are multiple advantages of investment in a fund of funds, these investments also have certain limitations. Some of such limitations are discussed below.
These are actively managed funds, hence the expense ratio of investment in a fund of funds is higher than other investment products (for example, ETFs). This can potentially reduce the returns of the investors.
The tax liability is a crucial factor to be considered while making any investment. The tax structure of fund of funds is quite complex and may potentially increase the tax liability of the investors. Hence it is necessary to know all the necessary details of such funds primarily their composition.
Tax in the form of capital gains is levied on the investors at the time of redemption of the principal amount invested in the fund. The structure of these funds is the basis for the tax levied at such time and is in line with regular mutual funds.
Apart from this, tax is also levied on dividends received from the fund in the hands of the investor. Dividends are included in the taxable income of the investors and taxed as per the applicable slab rates.
These funds are subject to a limited redemption facility. The investors may not have the opportunity to redeem their investment in liquid cash as and when needed.
Investment in a fund of funds provides the investors with potentially unlimited access to various securities and assets. This type of investment is best suited to risk-averse investors or novice investors who are looking to find a foothold in the stock markets but want to avoid the high risks associated with it.
Is a Demat account mandatory for investment in a fund of funds?
No. The investment in fund of funds is held in the form of units like regular mutual funds. This means that a demat account is not mandatory for such investment products like it is in case of ETFs.
Are funds of funds good for beginners?
Yes. Fund of funds are an excellent investment choice for beginners that seek good investment products at lower risk. But it is important to understand the way they work, taxation, and other features of Fund of funds before investing in them.
What are currently the top fund of funds in India?
A, Currently some of the top fund of funds are mentioned below
Are dividends received from fund of funds taxed in the hands of investors?
Yes. Dividends received from fund of funds were not taxed in the hands of investors but are taxed in the hands of the fund houses till FY 2019-20. However, now they are taxed in the hands of the investors according to their applicable slab rates.
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