Investment word of the day: Fund of funds —what is FoF and how does it work? Types, advantages and more

A Fund of Funds (FoF) allows investors to make a single investment while giving them access to a diversified portfolio across multiple securities. It invests in multiple mutual funds, allowing investors to diversify their portfolios and distribute risks.

What is a Fund of Funds?

The Association of Mutual Funds in India (AMFI) defines FoF as “an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities". A FoF primarily invests in the units of another mutual fund scheme. This type of investing is often referred to as multi-manager investment.

FoF allows investors to distribute risks by diversifying across multiple securities. The investments included under FoF are part of other mutual fund schemes or mutual fund houses. It is typically believed that FoFs are suited primarily to small investors who want exposure to different securities and those who do not have the expertise to choose a single asset class to invest in.

How does FoF work?

Similar to mutual funds, which trade in different securities, such as equity and debt instruments, on behalf of investors, FoF invests in other mutual funds. Depending on the investment strategy, the fund manager can invest in a single fund or funds of different fund houses.

Fund of Funds — Types

Asset allocation funds

Asset allocation funds include a set of diverse securities such as equities, commodities, and debt instruments.

Gold funds

Gold funds are a type of mutual fund that primarily trades in gold securities.

International fund of funds

These funds invest in stocks of companies listed outside of India, giving global exposure to an investor.

Multi-manager fund of funds

A multi-manager fund of funds diversifies investments by holding a portfolio of other mutual funds, each managed by a different, specialised fund manager.

ETF fund of funds

These funds constitute exchange-traded funds in its portfolio and are a popular investment tool in the country.

Disclaimer: This article is for informational purposes only and does not constitute financial advice; please consult a qualified financial advisor before making any financial decisions.