Who should invest in Fund of Funds?

Short Answer

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.

Detailed Answer

About Funds of Funds?

Funds of Funds are a type of mutual fund that invests in other mutual funds to increase accessibility and diversification. FoFs (Funds of Funds) are managed by professionals who shortlist and select the funds for further investments.

Like a mutual fund, a FoF invests the collected money into various funds of a particular category to get the best returns. A FoF also invests in abroad markets to provide better reach to investors.

Who should invest in Fund of Funds?

Funds of funds offer broad diversification due to their underlying nature. It picks other professionally managed portfolios so that even if a couple of assets doesn't perform well, the overall portfolio could deliver decent returns. Now the question arises who should invest in Fund of Funds!

Let's look at who would primarily invest in Fund of Funds.

1. Retail Investors with limited funds

Small retail invests can invest in Fund of Funds to get better exposure with limited capital. FOFs include many equity and debt securities which are beyond the reach of ordinary investors. With this instrument, small investors can access such investments and benefit from them.

In common equity shares, an individual has to purchase individual shares to construct a well-balanced portfolio. Whereas here, you can get multiple professionally managed portfolios all under one fund.

2. Risk-averse Investors

Fund of Fund provides excellent diversification which results in reduced risks or downside. Therefore investors who are not willing to take high risks can invest in such schemes. Additionally, you also invest in FoFs for the long term (3-5 years), therefore it also shrugs the short-term volatility of the market. The broad diversification of the funds also helps in reducing the overall volatility (Beta) of the portfolio.

These were the two primary types of investors who can look at investing in a Fund of Fund. Although these funds offer great benefits, it comes at a cost. The expense ratio of these funds is generally higher than traditional mutual funds. This is because of the multiple managers involved which in results increases the overall expenses. But even with the additional expenses, this remains a good proportion for small retail investors who are looking for global and domestic exposure.

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

Are market highs good to invest in Equity mutual funds?

Understanding the relative position of the market, the absolute values do not matter much. What matters is what is the earnings multiple, currently the market is trading at, popularly captured by a metric called P/E ( Price to earnings).

Which is better investing in equity, mutual funds, or keeping money in banks?

Equity and mutual funds are perfect if you want to invest in companies while seeing your money grow in a short period. Moreover, the chances of compounding your investments are higher. But the risk associated is equally greater considering the growth of companies and their performance in offering returns. But then keeping money in the bank is the safest way to keep your earnings. But then, due to inflation and low returns on interest, that value of the money kept might be cut down drastically.

How can NRIs from the United States invest in Mutual Funds in India?

NRIs living in the United States can invest in Indian Mutual Funds, but there are some hassles that have to be overcome. You will require an NRE, NRO, or FCRN account in order to convert the foreign currency into Indian rupees, post which you can complete the KYC and begin investing in Indian Mutual Funds.

What is the best way to hedge your investment portfolio?

Hedging your portfolio is important if you want to generate consistent long-term returns on your capital. Some of the classic methods to hedge your capital are to diversify, modify your asset allocation according to market cycles, and use derivative instruments like futures and options to hedge your portfolio.

Can NRIs invest in mutual funds in India?

Yes, any NRI can invest in mutual funds in India, if they follow some certain conditions under Foreign Exchange Management Act or FEMA Act 1999.

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.

Is Groww the perfect platform to invest in mutual funds?

Groww is one of the best mutual fund applications that offers various direct mutual fund investment options. Moreover, it does so without charging anything. It offers a magnitude of offerings and features ranging from the brief description of the mutual funds to the various brokerage and other calculators for investors' references.

Should you take a Loan to Invest in Mutual Funds?

Borrowing money for investing in mutual funds never really pays off. Its not the right thing to do given that mutual funds returns would not provide sufficient returns in the time which your loans have to be paid back.

Is Groww App Safe for Mutual fund and Stock Investing?

Yes, Groww app is completely safe for mutual fund, stock investing and trading. As a popular mutual fund investment plaftorm, Groww established itself quite well in the past few years. Now, it has also enetered the stock broking space so it's really good to see new entrants amid existing top discount brokers in India.

Which is better FD vs. Mutual Fund vs. Real Estate Investment?

FD vs Mutual Fund vs Real Estate Investment has its advantages in terms of how much you invest and your investing period. Longer the period, higher the returns.