Fund of Funds (FoF) is a mutual fund which invests in the units of other mutual funds including but not limited to index funds and ETFs. The underlying funds may or not be managed by the same Asset Management Companies (AMC) which is managing the FoF.
For instance an upcoming band in town is buying new instrument such as Kick Drums, Hi-Hats, Guitar and keyboards. Instead of buying all these instruments distinctly, the lead musician of the band decides to go and buy all the different musical instruments at one place. Buying all the instruments under one roof offers him convenience, reduces his time and effort to search and do due diligence. And in case of after sales, he doesn’t have to roam around to different places.
Fund of Funds is similar to that music shop which sells different music instrument at one place. Fund of fund combines different units of mutual funds scheme with different characteristic and distinct risk and return profile. Carefully combining different scheme offers the benefit of diversification, which an investor can get access to simply via single fund of fund instead of buying different funds.
Since it combines units of mutual funds scheme which may be managed by different fund manager/AMC, fund of fund is also known as multi-manager investment
Investors should note that they will be bearing the recurring expenses of the relevant fund of fund scheme in addition to the expenses of the underlying schemes in which the fund of fund scheme makes investment.
In such cases, investor should study about the underlying of fund of funds. For instance, if an underlying is ETFs, the cost of fund of fund including cost of ETFs will be usually lower than fund of fund with underlying being actively managed schemes, since the TER of ETF is itself very low.
The aforesaid information is general in nature and is intended for educational purposes only. It doesn’t offer or solicit a particular product. Investor should consider financial advisor for investment and taxation purpose.
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.