| Explore the world of Fund of Funds (FoFs). |
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What is a Fund of Funds (FoF)?
A Fund of Funds (FoFs) is an investment strategy of holding a portfolio of other investment funds directly in shares, bonds or other securities. In case of equity mutual funds, whereas a traditional mutual scheme portfolio would comprise a portfolio of stocks, a Fund of Funds scheme would consist of a portfolio of one or multiple mutual fund schemes. |
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| Pros and Cons |
| Fund of Funds extend the concept of diversification beyond what a traditional mutual fund can offer, since one can theoretically invest in a mix of performing mutual fund schemes instead of a single scheme. Fund of Funds offer other significant benefits to the retail investor: |
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| Fund Manager Expertise: FoFs allow an Asset manager to extend the |
| benefits of utilizing expertise of a fund manager based in one location to multiple locations. E.g. An FoF focusing on China and run by a Chinese fund manager can have feeder funds launched in multiple locations. Since all the feeder funds will feed into the underlying fund, they would benefit from the expertise of the Chinese fund manager instead of attempting investments in the Chinese markets individually. |
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| International Exposure: FoFs allow an investor to take exposure to |
| International geographies and thereby diversify his portfolio beyond local boundaries. With several global fund managers having set shop in India, they offer different FoFs that focus on individual countries across developed and emerging economies. |
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| Track Record: Fund of Funds do away with the constraint that new fund |
| offers face. Since the new fund will invest in FoFs, it can provide a track record of the underlying fund to the investor and hence help him or her take a more informed decision. |
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| Opportunity to invest in Niche Funds: Several global asset |
| managers prefer the fund of funds route as an investment. In this case, individual niche funds feed into the underlying fund, thereby ensuring a reasonable corpus for the fund manager to work with. At the same time, the investor gets an opportunity to invest in such distinct schemes. |
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| Invest in ETFs with the convenience and affordability of a mutual fund: |
An FoF wherein the underlying fund is an ETF (e.g. Gold ETF) allows an investor to benefit from the minimal tracking error of ETFs while at the same time enabling the investor to invest systematically and hold units in physical form instead of the mandatory demat form as required in ETFs.
While there are several benefits to FoFs, they do have certain disadvantages. FoFs have higher cost structure compared to traditional funds. In case of a regular equity mutual fund scheme, the investor has to incur the expense for managing the scheme, in case of FoF, the investor also has to incur the expense of managing the underlying fund, thereby increasing the cost angle. In addition, one has to consider the currency risk since the feeder fund and the underlying fund would have different currency denominations. |
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| India scenario |
| Indian Asset managers have several FoFs available in their existing product portfolio. There are FoFs that focus on specific countries while some FoFs focus on specific asset classes e.g. Gold. If one is interested in taking exposure to the Chinese markets, he can consider Mirae Asset China Advantage Fund which is an open ended fund of funds |
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| scheme. It seeks to generate long term capital appreciation by investing predominantly in units of the Mirae Asset China Sector Leader Equity Fund (underlying fund) and/ or units of other mutual fund schemes, units of ETFs investing in equities and equity related securities of companies domiciled in or having their area of primary activity in China and Hong Kong. This fund allows investors to take exposure to the Chinese markets including local Chinese companies listed on the Shanghai and Shenzhen stock exchanges. |
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