What are the advantages and disadvantages of investing in Fund of Funds?

Short Answer

Fund of Funds has some key advantages such as High Diversification, Low volatility, High accessibility, etc. On the other hand, it also has some drawbacks which include a High Expense ratio, low transparency, and Mediocre returns.

Detailed Answer

What is Fund of Funds?

Funds of Funds can be considered as a mutual fund, which is managed by multiple professional managers. A Fund of Fund generally collects the money from investors and invests the pool of money into different other funds.

This makes FoFs highly diversified as well as safe. Retail investors can get access to abroad funds as well as some other complex investment option through these funds easily. Let's know some of the advantages and disadvantages of 'Funds of Funds' here.

Advantages of Fund of Funds

FoFs provide quite many advantages, let's go through some of their key advantages.

1. Highly Diversified

Fund of Funds invests in other professionally managed portfolios which makes it highly diversified. These portfolios have many stocks and other assets in them which makes them an attractive option for low-risk investors. Risk-averse investors can also invest in FoFs as the overall risk is low.

2. Lower Volatility

A well-diversified portfolio helps investors to beat market volatility and give good returns. Diversification also comes into play when some of the stocks in the portfolio don’t perform well, the remaining stocks can make up for them. FoFs have an adequate number of high-quality stocks in them, therefore the Beta (a metric to measure volatility) is low.

3. High Accessibility

Fund of Funds offers great products at a great price to small investors. These funds are managed by highly skilled professionals who bundle good quality assets under one fund. In this way, you can enjoy high-quality and well-diversified assets at an affordable price.

4. High-quality Investments

These funds are managed by well-trained and highly qualified fund managers. Therefore, your can stay assured of the quality of these funds. The assets included in these funds are derived through research and screening.

Now that we have examined some of the key advantages of Funds of Funds, let's look at some of the disadvantages.

Disadvantages of Fund of Funds

1. Higher Fees and Expense Ratio

More than one fund manager is involved in these types of funds. This results in higher management fees and other expenses. The investors have to bear these expenses in the form of an expense ratio. Because of this, some FoFs can get expensive in terms of expenses, when compared to normal equity mutual funds.

2. Average returns

As Fund of Funds is highly diversified, the returns provided are somewhat average. If you are expecting extraordinary returns then these funds might not be for you as these are geared towards safety and not for superior returns.

3. Low transparency

FoFs are not so transparent as Mutual Funds. This is because the fund manager invests in multiple mutual funds and keeping a track of all of them can be sometimes difficult. You on top don’t get to see the detailed percentage of the holding in specific funds which makes it further difficult to track the underlying investments.

These were some of the prime advantages and disadvantages of Fund of Funds. Currently looking at the advantages and disadvantages, you must decide whether to invest in them or not. Although if you are a low-risk investor, then FoFs can be a good addition to your portfolio.

Tagged With: fund of fundsmutual fundsexpense ratiodiversificationtransparencyvolatility
Ask your query and our expert community would be happy to help
Discussion (0)
Related FAQs

How to Invest in Index Funds in India?

There are several options to invest in index funds. It can be done through online portals, agents, demat account and AMC website.

Is it better to buy ETFs or Mutual Funds?

ETFs (Exchange Traded Funds) & Mutual Funds are investment avenues that are managed by a Fund manager and allow Retail investors to invest in them. ETFs are listed on Stock Exchanges, and Mutual Funds are not. Usually, ETFs track an Index or sector whereas Mutual Funds offer a much more variety of Funds from which an investor can choose from. Both of these investment vehicles have their own merits and demerits. One should evaluate their risk profile and goals and choose one of them either. Find out which of these is the better option.

How to get exposure in U.S stocks?

Investing in abroad markets has become quite easy these days. One can get direct and indirect exposure into the U.S. market through various methods. Investing in foreign markets like the U.S provides many benefits like Diversification into the top companies of the world, Benefit of Currency Depreciation, etc. Apart from directly purchasing the stocks listed on the U.S. stock exchanges, there are some different methods as well. Know the best methods of getting exposure to the U.S. stock markets.

How to invest in mutual funds with or without demat account?

Investors looking to invest in mutual funds without a Demat account can invest through financial institutions, independent financial advisors, AMC, and online portals.

How are ETFs different from Mutual Funds?

ETFs (Exchange Traded Funds) and Mutual Funds are similar investment vehicles that provide the investors various features. Both have their benefits and shortcomings. ETFs are a good option for passive investors who want to invest in a particular Index or Sector without much rebalancing. On the other hand, Mutual Funds are a better option for active investors who are more active with their investments. One can switch between funds according to their current strategies.

What are Liquid Funds? Meaning & Details

Liquid funds, a type of mutual funds which invest in different money market instruments. The withdrawals from these funds are processed within 24 hours and that's why these are regarded as liquid assets. The fund manager gets flexibility to meet immediate redemption requests.

Who should invest in Fund of Funds?

Funds of Funds are professionally managed funds that invest in several types of funds. Retail investors with limited capital and who are unwilling to take too much risk can invest in such funds. As FoFs are highly diversified, the overall risk is reduced for investors.

Which is the best investment plan in India for 1 year?

The best investment plans in India for a year are to invest in fixed deposits, short-term funds, and ultra-short-term funds. These are less risky and produce relatively higher returns than banks.

Can a retail investor buy Government Securities?

Government securities include both T-Bills (Treasury Bills) and Government bonds which are both short and long-term instruments issued by the Central & State governments for various purposes. Retail investors are allowed to invest in G-Secs provided by the RBI. One can buy them directly from the Stock exchanges in a non-competitive method.

How to choose stocks for long term investment in India?

There are various terms that play a huge role in determining how to choose stocks for long term investment such as P/E ratio, dividend consistency, etc. For a more elaborative information head below and read the explanation given for better understanding.