What are the types of Fund of Funds?

Short Answer

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.

Detailed Answer

What is Fund of Funds?

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.

Different types of Fund of Funds

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.

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Related FAQs

Why are ETF or Exchange Traded Funds not popular in India?

Exchange traded fund is a freely marketable security which tracks a particular index, commodity, bonds or combination of assets. they aren't popular as there is no additional tax incentives, not enough liquidity, under performs most of the time, lack of choices, lack of institutional interest, costs are low but not enough and lack of awareness.

What are Gold BeES?

Gold BeES is a type of BeES (Benchmark Exchange Traded Securities). It is a type of ETF (Exchange Traded Fund) that's listed on the stock exchanges. This category of funds has a benchmark, in this scenario "Gold" which it tracks and follows. Gold BeEs has its underlying as Gold and the performance of the fund purely relies on the movement of Gold. Find out the advantages and features of Gold BeES.

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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.

What are the types of ETFs available for investment?

Exchange-Traded Funds or ETFs are an investment tool that tracks particular securities like Equity, Commodity, Bonds, etc. ETFs are available for many categories from which one can choose from. These are listed on Stock Exchanges (NSE & BSE) hence there is ample liquidity and one can easily buy and sell these at their desired price during market hours. Some ETFs available for investment in Indian markets are Equity ETFs, Debt ETFs, etc.

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.

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