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Fund of Funds

Fund of funds is Mutual fund scheme that invests in other mutual funds which is designed to suit the varying needs of different investor categories based on their risk profiles, return expectations and investment goals. These are basically good for small investors who do not wish to take too much risk. Funds of Funds is also used under the Startup India initiative, as confirmed by Prime Minister, Mr. Narendra Modi. (Confirmed by economic times, 07th June, 2018). Funds of Funds will be useful for startup funding in India and will be a huge contribution towards venture capital investing in the Indian startup ecosystem.

What is Fund of Funds?

In simple terms, Fund of Funds is a mutual fund scheme that invests in other mutual funds schemes. They offer tax friendly rebalancing of your portfolio and the ones offered in India belong to the same fund house. The plan remains to invest in a portfolio that consists of underlying assets rather than directly investing in stocks, bonds and other securities. You can experience a good exposure without very high risk by diversifying the asset allocation in a variety of fund categories.

Advantages of Investing in Fund of Funds

Tax-Friendly

In case you wish to rebalance your assets, there will be no tax on capital gains for this internal transaction. Thus, when your Fund of Funds is re-balanced to maintain an allocation debt and equity, there will be no tax on capital gains.

Ease of handling

With just one NAV (Net Value Asset) and one folio, it is easier to handle the reduced number of funds that require managing.

Professional Fund Management Services

Investing in Fund of Funds allows you to try out investing in professionally managed funds before they can venture out on investing individually.

The Credibility of Portfolio Managers

Fund of Funds requires the background of managers to be checked and verified. Therefore, you can be rest assured that your funds are handled by a credible person.

Opportunity for investors with limited capital

It also allows investors who own little capital to partake in diversified funds that have underlying assets. If not, these assets otherwise would be hard for investors to access individually.

Disadvantages of Investing in Fund of Funds

High Expense Ratio

  • Like any other Mutual Funds, Fund of Funds also incurs expenses just like any other mutual fund schemes. However, unlike Mutual funds, there is some extra cost involved. Also, apart from the usual management and administrative costs, there is an added expense pertaining to the underlying funds.

  • Despite the fact that the Fund of Funds ratio is 1%, as an investor you will still pay this amount on every fund that the Fund of Funds own.

Tax Implications

In case you get a dividend in excess of INR 10 lakh, an Income Tax of 10% is levied.

Involves too much Diversification

Fund of Funds is built in such a way that it is invested in many funds which is invested in number of securities. It also possibly proves that Fund of Funds ends up owning the same stocks and securities through different funds. Therefore, it reduces the potential for diversification.

Things to Consider as an Investor

FoF’s work best in case of allocation of funds

  • Allocation of Funds is, when you planning for your long term goal, you will need to create a risk tolerance, transactional timelines, tax implications, etc. The plus point about FoF’s is that they help you with risk tolerance, transactional timelines, tax implications, etc.
  • Your long term goals are also taken off if you happen to invest in a single FoF with a single NAV.
  • Therefore, with regards to asset management Fund of Funds can make a lot of difference.

Are Fairly Inefficient Tax-wise

There is a taxation inconsistency with respect to FOF’s. For instance, in case your FoF is a fund of equity fund, for tax purposes it will be considered as non- equity. In that case short term will be 3 years and STGC will be taxed at peak rate.

FoF’s are convenient, but expense ratios can be high

FoF’s are convenient as you can reach multiple goals with a single product. Additionally, it is convenient as there is a single NAV to track. However, the downside of Fund of Funds is that they become expensive. Cost of managing of fund and cost of managing of Fund of Fund is required. And when these costs are added, the total expense ratio (TER) becomes very high.

Apart from the above, you can consider the following as an investor before investing in Fund of Funds:

  • You must always weigh the pros and cons before making any investment decision
  • It is vital to know your fund manager
  • It is also important to know your risk tolerance, transactional timelines, tax implications, etc.

Fund of Funds available in India

Kotak Asset Allocator Fund

This is an open ended Fund of Funds scheme. Generating long capital investment from a portfolio created by investing in specified open-ended equity, and debt schemes of Kotak Mahindra Mutual Fund is the objective of this scheme. But, there is no assurance that the investment objective will be realized.

PeriodRETURNS (%) (NAV as on Jul 09,2018) Rank
1 Month0.63
3 Months15
6 Months23
1 Year4.89
2 Years9.76
3 Years9.56
5 Years16.32

Birla SL Global Real Estate

Birla SL Global Real Estate is an open ended fund of funds scheme that mostly invests in “ING (L) Invest Global Real Estate Fund”, a global real estate fund that has flexibility to invest in real estate securities across the world. It aims to provide capital appreciation. The main objective of this fund is to seek capital appreciation by investing predominantly in ING (L) Invest Global Real Estate.

PeriodRETURNS (%) (NAV as on Jul 09, 2018) Rank
1 Month3.12
3 Months10.72
6 Months8.62
1 Year11.54
2 Years-0.79
3 Years4.39
5 Years4.67

HSBC Managed Sol- Growth

The main objective of this scheme is to invest at least 65% in ING Global Real Estate Securities Fund, up to 35% in the units of other similar overseas mutual fund schemes and may also keep up to 20% of its corpus into money market securities.

PeriodRETURNS (%) (NAV as on Jul 05, 2018) Rank
1 Month-0.46
3 Months-1.810
6 Months-4.98
1 Year5.58
2 Years12.75
3 Years10.15
5 Years--

Quantum Equity FoF

The Quantum Equity FOF is a long term equity fund. This product is suitable for investors who seek Investments in portfolio of open-ended diversified equity schemes of mutual funds registered with SEBI whose underlying investments are in equity and equity related securities of diversified companies.

PeriodRETURNS (%) (NAV as on Jul 09, 2018)Rank
1 Month-1.37
3 Months-0.77
6 Months-5.69
1 Year7.35
2 Years14.13
3 Years113
5 Years19.21

Birla SL AAF

The main objective of this scheme is to provide income and capital appreciation along with diversification by investing in a basket of debt and equity mutual fund schemes of the AMC, in line with the stated asset allocation.

PeriodRETURNS (%) (NAV as on Feb 04, 2018)Rank
1 Month--
3 Months--
6 Months--
1 Year--
2 Years--
3 Years--
5 Years--

Principal Global Opportunity fund

The main investment objective of the Scheme is to provide long term capital appreciation by predominantly investing in overseas mutual fund schemes, and a certain portion of its corpus in Money Market Securities and/or units of Money Market / Liquid Schemes of Principal Mutual Fund.

PeriodRETURNS (%) (NAV as on Jul 09, 2018)Rank
1 Month-1.810
3 Months3.24
6 Months0.86
1 Year21.92
2 Years20.72
3 Years11.32
5 Years8.35

Birla SL Latin America Equity

The Investment objective of this scheme is to seek capital appreciation by investing predominantly in ING (L) Invest Latin America Fund, while some part may also be invested in the units of other similar overseas mutual fund schemes. However, there is a possibility that it could invest some portion of its corpus in money market securities, in order to meet liquidity requirements from time to time.

PeriodRETURNS (%) (NAV as on Jul 13, 2018)Rank
1 Month--
3 Months--
6 Months--
1 Year--
2 Years--
3 Years--
5 Years--

FAQs on Fund of Funds

What does Fund of Funds mean?

Fund of Funds is a mutual fund scheme that invests in other mutual funds schemes.

Examples of Fund of Funds?

Following can be considered as example for Fund of Funds

Fund of Funds1 year Return3 year Return5 year Return
Aditya Birla Sun Life Global Commodities Fund16.583.192.35
Kotak Gold Fund-Regular Plan7.413.521.59
SBI Gold Fund7.13.591.58
HDFC Gold Fund6.583.651.82
Axis Gold Fund6.581.890.09

Note: The Rankings are based on Returns calculated on NAV as on May 29, 2018

List some Funds of Funds?

  • Sundaram World Brand – Sr II- DP-G
  • Sundaram World Brand – Sr III- DPG
  • Inveso IF- Global Equity Income D (G)
  • Pan European Equity (G)
  • Edelweiss US Value Eqt Offshore- Dir
  • SBI Dynamic Asset Allocation Fund-DP (G)

How does a fund of funds work?

  • Funds of Fund offer tax friendly rebalancing of your portfolio and the ones offered in India belong to the same fund house. The plan is to invest in a portfolio that consists of underlying assets rather than directly investing in stocks and bonds and other securities.

  • It provides benefit of low cost and diversification. In this, a manager decides to invest the funds in a portfolio of mutual funds, each managed by other mutual fund managers.

Can you lose money in Fund of Funds?

Yes, since mutual funds are subject to market risk, you can lose money in them.

What is fund of funds private equity?

Private equity fund of funds are investment vehicles that pool capital from people to invest in several different private equity funds.

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