June 06 , 2012
Fund of Funds in simple words means creating a portfolio of other performing mutual funds. Fund of funds is a mutual fund holding underlying assets as mutual fund units instead of shares and securities. Fund of Funds is also known as multi manager funds.
In pursuit of diversification you tend to hold many mutual funds of various asset management companies and of different sectors. So you may have a HDFC Top 200, DSP Blackrock Top 100, Franklin India Bluechip Fund etc. in your portfolio. Now assume a mutual fund holding units of these funds and you do not go through the hassles of managing too many folios and schemes. This is exactly what fund of funds does.
But currently there is no fund of funds that invest in mutual funds of other asset management company. For example Templeton Asset Management invests in funds of their own performing funds.
Fund of funds are useful if you need to take exposure to multi-assets or multiple countries. Fund of funds tends to be more expensive than the regular mutual funds as management fees are charged on underlying mutual fund as well as issued Fund of Funds.
Fund of funds are not suited for first stage investors and small investors. It may be suitable for large investors who are particularly looking for investing in foreign companies. Investors looking for exposure to others non-traditional asset classes can also use the fund of funds route.
Another benefit the investors can get is in terms of its tax efficiency. In case there is any short term capital gains accrued due to sale on underlying equity mutual funds, it does not impact the fund of funds unit holders.
Currently there are approximately 50 fund of funds available in the Indian market. None of these fund of funds have given eye catching returns. In fact most of them fared poorly compared to other mutual fund returns.