A Fund of Funds (FOF) is a mutual fund that invests in a collection of other mutual funds or hedge funds, instead of investing directly in individual stocks, bonds, or other securities. This strategy allows investors to achieve broad diversification and access to a variety of asset classes and investment strategies through a single investment.
Fund Of Funds Meaning
The primary meaning of a Fund of Funds is to provide investors with a diversified portfolio through a single investment. By pooling money from multiple investors, FOFs can invest in a range of funds managed by different investment firms, each specializing in specific market sectors or strategies.
Fund Of Funds Example
An example of a Fund of Funds would be a global equity FOF that invests in several international mutual funds, each focusing on different regions or countries. Another example could be a retirement FOF that allocates investments across various bond and stock funds, adjusting the mix as the target retirement date approaches.
How Does FOF Work?
A Fund of Funds works by investing in a selection of other funds. The FOF manager selects and allocates assets among various mutual funds, hedge funds, or private equity funds, based on the FOF’s investment objectives. This allows investors to benefit from the expertise of multiple fund managers and strategies.
Benefits Of Fund Of Funds
The benefits of investing in a Fund of Funds include diversification, which reduces risk by spreading investments across various asset classes and strategies. FOFs also offer access to professional fund management and the potential to invest in specialized or exclusive funds that may be otherwise inaccessible to individual investors.
Disadvantages Of Fund Of Funds Investing
Despite their benefits, Fund of Funds investing has disadvantages. The layered structure often leads to higher fees, as investors pay expense ratios for both the FOF and the underlying funds. Additionally, the diversified nature of FOFs can sometimes dilute high-performing investments, potentially leading to mediocre overall returns.
Best Fund Of Funds In India
The table below shows the Best Fund Of Funds In India based on a 3-year CAGR.
| Name | AUM (in Cr) | NAV ( Rs ) | CAGR 3Y ( % ) |
| Franklin India Dynamic Asset Allocation FOFs | 1241.30 | 159.34 | 21.24 |
| Nippon India Passive Flexicap FoF | 215.10 | 18.21 | 20.84 |
| Kotak Multi Asset Allocator FoF-Dynamic | 1190.88 | 200.20 | 20.33 |
| Mirae Asset Equity Allocator FoF | 623.91 | 21.27 | 18.43 |
| Nippon India Nifty Next 50 Junior BeES FoF | 277.40 | 20.41 | 17.96 |
| Aditya Birla SL Financial Planning FOF Aggressive Plan | 182.28 | 48.24 | 16.91 |
| Quantum Equity FoF | 110.48 | 69.45 | 16.89 |
| Aditya Birla SL Asset Allocator FoF | 188.90 | 28.55 | 15.12 |
| Motilal Oswal Nasdaq 100 FOF | 4234.87 | 29.04 | 13.29 |
| Mirae Asset Nifty 100 ESG Sector Leaders FoF | 136.40 | 16.15 | 13.29 |
What is a Fund of Funds? – Quick Summary
- A mutual fund investing in other funds, FOFs offer broad diversification and access to multiple asset classes through one investment.
- FOFs provide a diversified investment portfolio by pooling funds to invest in different funds, each specializing in specific sectors.
- Examples include global equity FOFs investing in international funds and retirement FOFs diversifying across bond and stock funds.
- FOFs allocate assets among various funds based on investment objectives, allowing investors to benefit from multiple fund managers’ expertise.
- Benefits include risk diversification, professional fund management, and access to specialized funds not usually available to individual investors.
- FOFs often have higher fees due to layered investment structure and can lead to diluted returns due to over-diversification.
Fund Of Funds Mutual Funds – FAQs
What is a Fund of Funds?
A Fund of Funds (FOF) invests in other mutual funds or hedge funds, offering diversified exposure across various asset classes and investment strategies.
What are the benefits of a fund of funds?
Benefits include diversified risk, access to expert fund managers, and exposure to specialized markets or sectors otherwise inaccessible to individual investors.
Is fund of funds a good investment?
FOFs can be good for diversification and professional management but may have higher fees and potentially diluted returns compared to direct investments.
What is a fund of fund in private equity?
In private equity, a Fund of Funds invests in various private equity funds, providing access to a range of private companies and investment strategies.
What is the difference between ETF and FoF?
ETFs are traded like stocks and typically track an index, while FOFs invest in other funds and offer broader diversification across multiple strategies.
Who invests in fund of funds?
FOFs attract investors seeking diversified, managed portfolios, including individual investors, institutional investors, and those new to investing or unable to directly access certain funds.
What is the tax on fund of funds?
Taxation of FOFs can be complex, involving potential taxes on distributions from underlying funds and the FOF itself, requiring consultation with a tax professional.
