What are FOF Funds : Types, Advantages and Disadvantages

FOF Funds are the newly introduced funds into the Indian Markets. These are the funds that utilize their pooled resources to invest into various hedge funds and other existing mutual funds. This means they don’t directly invest into the stocks or markets but they prefer investing into the other funds. The fund selection is based on the aim of the fund manager.

For instance if the fund manager wants the main aim to earn higher returns on the investment then he will elect the fund that has earned higher NAV over time. Thus the gain in NAV can be a factor for selection of funds. On the other hand if a fund manager wants to earn less returns and get stable returns on the investment then the fund selection would be based on the same aspects. Thus the aim of a fund manager is one of the primary aspects for fund selection in this kind of fund. 

Some very  famous domestic FOF funds are Motilal Oswal FOF Fund and Axis FOF Fund. Such funds are capable of investing into both international and domestic markets. They are a target for investors who want to diversify their portfolio into various exchanges across the world.

Such funds require the highest amount of monitoring as the fund allocation changes with high frequency. This is the reason that such funds are managed by highly trained professionals. This aspect not only makes the investments accurate but also minimizes the risk and losses.

Types of Funds of Funds

• ETF funds of funds

These funds don’t require the necessity of having a DEMAT account for getting stocks credited into the names of funders. The funds get allocated to people directly without the need for a DEMAT account. The only drawback in such kinds of funds is the higher amount of risk associated with them. These funds are exposed to more volatility and hence there is high risk associated with them.

• Multi manager funds of funds

As the name suggests such finds are managed by two or more managers together. This is one of the most used fund types in the markets. The managers share an opinion hence make a decision together. Due to this feature it is a safer fund in comparison to other funds.

• International funds of  funds

Such funds invest directly into the international markets. Due to such high exposure to multiple exchanges it becomes easy to opt for the best stocks in a longer period of time. However because of the investing feature into direct funds, the international stock holding funds are targets to them. Hence such funds are the best way for getting higher yield of returns.

• Asset allocation funds

Such funds invest into multiple instrument funds directly. They include debt instruments, equities and metals, currencies and many more. Hence all the assets that are traded into open markets are taken into consideration while these funds invest their money.

• Gold funds

They invest only into funds who trade gold and its related securities. Hence such securities directly into gold based funds and companies.

Advantages of Funds of Funds

The basic advantage would be the handling of money into better hands. As discussed, such money is handled by professional managers and out across various well built portfolios. Such managers are trained to invest into the funds on the basis of the aim and goals and hence better returns can be achieved. Also returns earned in such a way can be said to be planned returns.

Through investment into FOF one can get exposure to various different modes of investment and also various different exchanges and markets. The FOFs have the liberty to invest into international exchanges and get the benefits reeling out of them. Hence attaining diversification is easily possible into FOFs. 

The best part about FOFs is that it is not mandatory for someone to have access to a DEMAT account. One can invest into them without it as well. 

Disadvantages of Funds of Funds

These funds are a bit more expensive than others. The reason being it’s managed by professionals and highly skilled people. Hence expense ratio for such funds is very high. The assets opted have higher volatility so managing them is a tough job. Hence the managerial and primary expenses related to those funds is very high. Such expense is directly cut off from the earnings made annually.

Tax applied on the income earned from the FOF is taxed directly from the investors. Hence the income is added to the STCG and LTCG and the entire amount is made taxable. On the other hand the dividend income as usual is taxed on the fund itself.

For earning handsome returns on FOFs it is necessary to keep your investment into them for a longer time period. Hence one needs to make sure that he or she never lacks their liquidity needs. If the amount is kept for a period of 3 to 5 years one can note great returns achieved.