Similar to traditional Mutual Funds, Fund of Funds are professionally managed funds that are available in multiple types. Some of the types of FoFs are Gold FoFs, ETF FoFs, International FoFs, Multi-Manager FoFs, and Asset allocation FoFs.
A Fund of Funds is similar to Mutual Funds where a fund manager decides to invest the pool of money on your behalf. These funds tend to invest in other mutual funds or other investment instruments to get an overall diversified portfolio. The fund manager of a Fund of Fund enjoys the liberty to choose the asset and the funds for investment.
There are various types of Fund of Fund consisting of various types of assets. Let’s look at some of them.
1. Multi-Manager FoFs
This is the most common type of Fund of Funds. Under this category, a fund manager invests in other mutual funds that are managed by individual fund managers. Because of the fact that this type of fund involves more than one fund manager, it is known as a multi-manager Fund of Funds.
2. Asset allocation FoFs
These types of funds invest in diverse types of assets like equities, debt, commodities (gold, silver), etc. As asset-allocated funds are exposed to equity and debt, it generates higher returns with reduced risks. The diversification among these asset classes provides a lower risk and reduced volatility.
3. Gold FoFs
If you want to invest in precious metals, especially Gold, a Gold Fund of Fund remains an excellent option. Gold FoFs have the underlying asset like Gold. But it invests in gold in various forms like gold mutual funds, physical gold, and also gold mining companies. This way you can receive diversified exposure to gold and on top, get the same returns as gold.
4. International FoFs
International Fund of Funds invests in abroad markets and international equities and bonds. Any investor, who is willing to invest in abroad markets can definitely consider investing in international funds. International funds additionally provide geographical diversification and offer higher returns.
5. ETF (Exchange Traded Funds) FoFs
Exchange-Traded Funds are a popular choice among retail investors, and ETF FoFs are equally popular. The reason being, to purchase an ETF, you require a Demat account. Whereas you can easily purchase an ETF FoF that contains the underlying as the ETF without a Demat account. Due to this ETF FoF are exceptionally popular. You can also invest in abroad ETF through this route.
These were the five types of Fund of Funds that are prevalent in India. FoFs are an ideal choice for investors who are looking to get a well-diversified and professionally managed portfolio at a reasonable price. You can invest in abroad markets, ETFs, precious metals, or a mixture of these under a Fund of Funds.