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A fund of funds invests in a portfolio of mutual fund schemes that consists of underlying assets rather than directly investing in stocks, bonds and other securities. The fund of funds (FOF) strategy aims to achieve broad diversification and appropriate asset allocation with investments in a variety of fund categories that are all wrapped into one fund.
In simple terms, an FOF aims to provide the added benefit of multiple fund managers and much more diversity than a single fund. By investing in FOF, an investor not only spreads out risk in stocks as per asset classes, but also gets a portfolio of fund managers to manage his money.
Could be suitable for small investors who are to not able to diversify their portfolio or who do not want to select mutual funds themselves because of lack of knowledge or time resources. By investing in Fund of Funds, investments of different categories, risk profiles, return expectations and goals can be managed.
Under Fund of funds, the fund manager tracks the whole mutual funds industry and after doing proper research selects the best schemes to invest in, and puts your money there. The underlying asset in these funds could be equity, debt, a mix of both or any other asset class like real estate or gold.