A Fund of Fund (FoF) is an investment strategy that focuses on building a diversified portfolio by holding multiple mutual funds, rather than investing directly in individual stocks, bonds, or securities. In a fund of funds scheme, the primary emphasis is on investing in units of other mutual fund schemes.

A little key can open big doors’ – and a Fund of Fund does just this! It is a single investment gateway to access multiple mutual funds often across economies, multiple asset classes and multiple fund managers, in a simple hassle-free manner. This approach, often referred to as multi-manager investment, allows investors to spread their investments across multiple funds, offering them the opportunity to diversify risk. The underlying investments of a FOF consist of units from either the same mutual fund or other mutual fund houses.

FOFs can be particularly beneficial for smaller investors seeking access to a wide range of asset classes.

A Fund of Funds is a type of mutual fund that utilizes its pool of resources to invest in various other mutual funds available in the market. It also invests in other hedge funds. A key characteristic of such mutual funds is that they are managed by highly skilled and trained professionals who are called fund managers. This expertise helps in making informed market predictions and reducing the potential for losses.

The risk levels in the portfolios of Fund of Funds mutual funds are customised to match the specific goals of the fund manager. When looking for higher yields, the fund manager may be willing to take on increased risk by investing in mutual funds with higher Net Asset Values (NAV). Alternatively, when looking for stability and capital preservation, the fund may allocate its resources towards low-risk instruments, aiming to minimize potential fluctuations in value. This strategic approach of investing allows the fund manager to optimize the Fund of Funds risk-return profile and cater to the specific preferences and goals of the investors.

Fund of Funds mutual funds offer the flexibility to invest in both domestic and international funds, depending on the decision-making authority of the fund manager or the investment strategy of the scheme. This flexibility of investment increases FOF fund’s portfolio diversification.

Fund of Funds come in various types, with each type determined by the specific investment objective of the fund. Here are different types of FoF funds that provide investors with diverse investment options:

• International Fund of Funds

  These FOFs target mutual funds operating in foreign countries. By investing in international markets, investors have the potential to benefit from the best-performing stocks and bonds in specific countries.

• Asset Allocation Funds

  FOFs of this type consist of a diverse asset pool, including equity, debt instruments, precious metals, and more. This allows for a balanced allocation of investments across various securities, aiming to generate higher returns while managing risk effectively.

• Multi-Manager Fund of Funds

  One of the most common types, these FOFs have an asset base comprising multiple professionally managed mutual funds. Each mutual fund within the portfolio is handled by a different portfolio manager, offering investors exposure to a range of asset classes and investment strategies.

• ETF Fund of Funds

  These FOFs include exchange-traded funds (ETFs) in their portfolio. By investing in an ETF through a FOF, investors can access a diversified basket of securities without the need for a separate Demat trading account. However, it is important to note that ETFs carry a slightly higher risk as they are traded like shares in the stock market, making FOFs with ETFs more susceptible to market volatility.

• Gold Funds

  FOFs in this category primarily invest in mutual funds that trade in gold securities. The portfolio can consist of either mutual funds or gold trading companies, depending on the investment strategy of the scheme. Gold funds provide exposure to the performance of the gold market.
  Each type of FOF offers distinct benefits and investment opportunities, catering to different risk preferences and investment goals of investors.

Fund of Funds follow a unique approach by investing in other mutual funds. The fund manager has the flexibility to invest in a single fund or a combination of funds from different fund houses. The fund manager of a FoF seeks out mutual funds whose investment objective and strategy align with that of the Fund of Funds. By investing in units of the selected mutual funds, the fund gets access to the returns of their underlying securities, without investing in the securities directly.

For example – an international Fund of Funds seeks out international mutual funds that invest in global markets. In this way, the international Fund of Funds gets access to the growth in global markets through diversified mutual fund investments rather than by directly investing in the global stocks.

Before making investment decisions in the best fund of funds, it is crucial for investors to consider several key factors. These factors include:

• Long-Term Commitment

  Often fund of funds operate with a long-term perspective, which means that investors should be prepared to lock in their investments for a significant period.

• Volatility and Market Fluctuations

  While fund managers strive to minimize risk through effective management and diversified investments, fund of funds are still subject to market volatility. It is important for investors to be aware that their investments may be influenced by market fluctuations.

• Expenses and Tax Implications

  Fund of funds schemes often have higher expenses and potential tax implications. These factors can impact the returns on investment and may result in lower-than-expected outcomes for investors.
  
  It is crucial for investors to understand these factors and conduct thorough research before committing their resources to fund of funds list of mutual funds. By doing so, investors can make informed decisions that align with their investment goals and risk tolerance.

Before making investment decisions in the best fund of funds, it is crucial for investors to consider several key factors. These factors include:

• Long-Term Commitment

  Often fund of funds operate with a long-term perspective, which means that investors should be prepared to lock in their investments for a significant period.

• Volatility and Market Fluctuations

  While fund managers strive to minimize risk through effective management and diversified investments, fund of funds are still subject to market volatility. It is important for investors to be aware that their investments may be influenced by market fluctuations.

• Expenses and Tax Implications

  Fund of funds schemes often have higher expenses and potential tax implications. These factors can impact the returns on investment and may result in lower-than-expected outcomes for investors.
  
  It is crucial for investors to understand these factors and conduct thorough research before committing their resources to fund of funds list of mutual funds. By doing so, investors can make informed decisions that align with their investment goals and risk tolerance.

FOF funds offer numerous advantages to investors. These include:

• Diversification

  One of the biggest advantages of FOFs is access to a diversified portfolio of mutual funds through a single investment. Instead of investing in multiple funds individually, FOFs provide the convenience of gaining exposure to various funds with different investment objectives.

• Ease of Investing in International Markets and Gold

  FOFs offer convenience when investing in international markets or specific asset classes like gold. Investors can easily access global companies or invest in gold without the need for separate accounts or intermediaries.

• Expertise of Multiple Fund Managers

  FOFs benefit from the expertise of multiple fund managers and their research teams. By investing in a portfolio managed by different fund managers, investors can potentially benefit from different investment styles and strategies.

• Simplified Portfolio Rebalancing

  Portfolio rebalancing is crucial for maintaining the desired asset allocation. FOFs facilitate easy rebalancing without incurring capital gains tax. Investors can benefit from portfolio adjustments while avoiding the tax implications associated with individual selling and buying transactions.

• Risk Mitigation

  Through the diversified nature of FOFs, investors can mitigate risk. By spreading investments across multiple funds, the impact of poor performance in one fund may be offset by the positive performance of others, reducing overall risk.

• Access to Specialized Funds

  FOFs provide access to specialized funds that focus on specific sectors or markets. This allows investors to take advantage of expert management and targeted exposure to specific investment themes.
  By considering the above advantages, investors can make informed decisions and potentially enhance their investment portfolios.

Fund of funds are ideal for novice investors as well as experienced investors.

For novice investors, they serve as a great entry point. FoFs provide a diverse selection of mutual funds that invest in a range of assets and securities. This can assist new investors in gaining exposure to various asset classes and creating a well-rounded investment portfolio.

For experienced investors, they offer access to certain asset classes that might otherwise be difficult to invest in through conventional mutual fund schemes. Experienced investors can leverage this advantage to diversify their portfolios by investing in international funds or other specialized sectors.

Before investing in a FoF, it is important to ensure that there is no portfolio overlapping with your existing investments and that the FoF scheme aligns with your risk profile and overall asset allocation strategy.

Note: The investors will bear the recurring expenses of the Fund of Fund (‘FoF’) scheme in addition to the expenses of the Underlying Schemes in which Investments are made by the FoF scheme.

Aditya Birla Sun Life AMC Limited /Aditya Birla Sun Life Mutual Fund is not guaranteeing/offering/communicating any indicative yield/returns on investments. The document is solely for the information and understanding of intended recipients only.