Fund of Funds: One of the basic fundamentals of investing is that instead of ever investing your entire capital in a single asset class, divide it into several parts and invest it in different options. One such option for investment is Fund of Funds, through which you can get better returns on your investment. Fund of Funds (FoF) are mutual fund schemes that invest in other mutual fund schemes. It is just like you invest your capital in a stock or bond. In this, the fund manager prepares a portfolio of other mutual funds. For example, if a fund manager wants to invest in gold, then under the Fund of Funds, he will invest money in those schemes whose money is invested in gold schemes.
If you are going to invest in mutual funds for the first time, then do not make these mistakes even by mistake, otherwise money will be lost.
Who should invest in Fund of Funds
- For investors who cannot take high risk, Fund of Funds is a better option.
- Investors who have very less capital to invest every month can opt for this.
For investors who want to invest for at least five years, then it is better to invest in Fund of Funds.
- Investors who want to diversify their portfolio to reduce their risk can invest in it.
Take care of these 5 things before closing the credit card, otherwise there will be a big loss
Benefits of Investing in Fund of Funds
- Tax-Friendly: If you rebalance your assets, there is no tax liability on any capital gain on this internal transaction. In such a situation, if the allocation between debt and equity is rebalanced, then there will be no tax liability on the capital gains generated.
- Ease of handling: There is only one NAV and one folio to track which makes it easy to handle.
- Investment opportunity in limited capital: For investors who have limited capital, it helps to diversify their portfolio through Fund of Funds.
Disadvantages of Investing in Fund of Funds
- More Expense Ratio: Investors also have to pay certain expenses (expense ratio) on mutual fund schemes. However, there is an additional cost to be paid in the Fund of Funds. In this, in addition to general management and administrative fees, additional expenses have to be paid for the underlying funds. Apart from the FOF expense ratio of just around 1 per cent, investors will have to pay some amount for all the funds that hold FOF.
- Tax Liability: Investors have to pay short term capital gains tax of 15 per cent as per the income tax slab if they exit before 36 months from the date of investment. If you exit the fund after 36 months, you will have to pay long term capital gains tax of 20 per cent along with indexation.
- Too Much Diversification: Fund of Funds invests in multiple funds which invest in multiple securities. This also increases the chances of your money getting invested in the same stock or securities through different funds. Due to this, the full benefit of diversification is not available.
(Note: This article is for informational purposes only. Investment in Fund of Funds is subject to market risks. Please consult your advisor before taking any investment decision.)