New Investor - Introduction to Fund of Funds

A lot of individuals are always in pursuit of lucrative investment options that might be able to help them achieve their financial goals. Everyone’s financial goals differ and, hence so does financial planning. Financial planning is essential especially if one wants to achieve financial stability. The financial market is flooded with a host of investment products catering to the needs of almost every individual. An individual usually decides to invest in a scheme depending on the risk that scheme carries.

Although understanding your risk appetite is important, it is equally necessary to have a defined set of financial goals. When you know your goals, choosing the right financial scheme might become easier. For example, if your goal is to build a retirement corpus, you may need to invest in a scheme that may offer you long term capital appreciation. Because one may need at least Rs. 25 lakhs to Rs. 30 lakhs at least to lead a stress free retirement life. On the other hand, an individual who wants to save enough money for his or her retirement corpus may have to invest in a scheme that helps to create capital appreciation over long term on retirement. And to meet short term goals like renovating a home, one may need to have to accumulate required amount to meet such short term goals.

Individuals who have zero risk appetite usually settle in with schemes that offer low but fixed interest rates. These are usually traditional instruments and opted by individuals who are averse to market volatility. On the contrary, if you are someone who doesn’t mind giving their portfolio a slightly aggressive approach by investing in schemes that offer high risk rewards ratio (although not guaranteeing the same), you may consider investing in mutual funds.

What are mutual funds?

For those who aren’t aware, mutual funds are a pool of professionally managed funds, that invest predominantly in equity and other debt and money market instruments like government securities, corporate bonds, commercial papers, call money, etc. What fund houses do is that they collect money from investors sharing a common investment objective and invest this pool of funds across the Indian and foreign economy. It is said that the performance of a mutual fund depends on the performance of its underlying assets and the sectors or industries in which they invest.

Investors receive shares in the form of mutual fund units in quantum with the money they invest and depending on the fund’s existing net asset value (NAV).

Of the several mutual fund categories available, Fund of Funds (FoFs) has caught the attention of seasoned as well as young investors. If you wish to find out more about FoF schemes, continue reading.

What is a Fund of Fund?

SEBI (Securities and Exchange Board of India), the regulatory body of mutual funds here in India defined Fund of Funds as, “A scheme that invests primarily in other schemes of the same mutual fund or other mutual funds is known as an FoF scheme. An FoF scheme enables investors to achieve greater diversification through one scheme. It spreads risks across a greater universe.”

In case that was a tad bit confusing, let us explain what the FoF scheme actually is. While most mutual funds invest in marketable securities like equity, debt, bonds, etc. an FoF scheme invests a minimum of 95 percent of its total assets in other mutual funds. FoF schemes are referred to as multi-manager funds solely because they invest in units of other mutual funds. It provides investors with an opportunity to take advantage of the benefits of diversification by investing in a variety of fund categories. Fund of funds takes a holistic approach to investment keeping in mind the market environment.

Benefits of investing in an FoF scheme

Here are some of the benefits of investing in an FoF scheme:

Diversification: Fund of Funds invests in other mutual funds, thus offering diversification to investors. When you invest in Fund of Fund, you invest in units of various other funds which would not have been possible otherwise.

Credible fund managers: FoF schemes are usually under the hands of professionally managed funds who apply a strategy to meet the scheme’s investment objective. Hence, these schemes might be considered by those who do not possess much knowledge about mutual fund investing.

Professional management: These funds offer investors an opportunity to invest in professionally managed funds they can venture and invest individually.

Invest via SIP: Investors can invest in an FoF scheme via SIP. Systematic Investment Plan (SIP), allows investors to give their mutual fund investments a disciplinary approach through systematic investment. You can decide how much to invest monthly in an FoF scheme and every month on a fixed date, the money is debited from your savings account and transferred electronically to the FoF scheme.

So now that you are aware about Fund of Funds, plan on investing? If you are new to mutual funds and do not understand much about financial planning, it is better to seek the help of your financial advisor.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.