Mutual fund investors are expected to keep a diversified investment portfolio. This way, if one asset class underperforms it is less likely for all the other assets classes to move in tandem and underperform. Usually if one asset class underperforms, others provide cushion and may even out the losses. Mutual funds are a pool of professionally managed funds whose investment objective is to seek capital appreciation by investing across money market instruments. The performance of a mutual fund highly depends on the performance of its underlying assets. Depending on its investment objective of the scheme and the risk profile it carries a mutual fund may invest in company stocks, debt securities, corporate bonds, commercial papers, debentures, company fixed deposits, certificate of deposits, etc.
As a mutual fund investor one must assure that he/she should keep a diversified investment portfolio. Depending on their risk appetite investors may allocate their assets to both equity and debt instruments. One’s investment objective and financial goals too, play a vital role in determining how much one should invest in what type of mutual fund schemes. Those with retirement planning in mind may invest in solution oriented schemes. On the other hand someone looking to build an emergency fund may compare several liquid fund schemes to determine which one is a consistent performer and offers enough liquidity
A funds of funds (FoFs) is a mutual fund scheme that primarily in other schemes of the same mutual fund or other mutual funds is known as a FoFs scheme. A FoFs scheme enables the investors to achieve greater diversification through one scheme. It spreads risks across a greater universe.
The most relatable example of funds of funds is a global fund or an international equity fund. The investment objective of an over fund is to generate capital income by investing in funds that invest in global economies like the USA. An international equity fund or a global fund may also invest in other money market instruments depending on the nature of the scheme and the benchmark it aims to outperform.
Why should you invest in Funds of Funds?
Funds of Funds like international equity funds give investors an opportunity to invest in foreign economies like the USA, United Kingdom, Japan and other European markets. If you are keen on adding an international touch to your mutual fund portfolio then you can invest in international equity funds. Since FoFs aim to generate capital gains by investing in other funds or economies. Investors should understand that markets and economies of different countries work in different circles. Thus funds of funds can offer diversification and also generate income when other mutual funds are underperforming. Since these funds depend on other funds for them to generate income, the expense ratio for owning a fund of funds is relatively low as compared to actively managed mutual funds. A fund of funds may invest in one or multiple mutual funds depending on its investment objective. For example a gold ETF invests in gold securities and tracks international gold prices to generate income. Asset allocation funds invest across various money market instruments including equity, debt, call money etc.
Although funds of funds may sound like a lucrative investment option to add to one’s mutual fund portfolio, one should consult their financial advisor who might be able to provide them with further assistance on funds of funds investment. One should also take into consideration the risk profile these funds carry. Investing beyond one’s risk appetite is not recommended. These are mutual funds that are constantly exposed to the market’s volatile nature and hence do not guarantee returns.
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