Did you want to invest in multiple mutual funds through a single fund? If yes, Fund of Funds (FoF) can be your go-to instrument. This blog sheds light on various aspects of FoF and why investing business cash in it can be a prudent option.
What are Fund of Funds?
Fund of Funds is a type of mutual fund that invests in other mutual funds. So, when you invest in an FoF, the fund invests your money in various mutual funds depending on its objective. With an FoF, you can invest in domestic and international funds.
How Does an FoF Work?
Let’s understand FoF with an example. Suppose you invest in FoF ‘AAA’. This fund’s portfolio comprises mutual funds ‘BBB’, ‘CCC’, and ‘DDD’. Note that each of the mutual funds ‘BBB’, ‘CCC’, and ‘DDD’ has its underlying portfolio. So, when you invest in ‘AAA’, you are basically investing in the securities held by funds ‘BBB’, ‘CCC’, and ‘DDD’.
What are the Different Kinds of FoFs?
Depending on the fund’s objectives, FoFs can be of various types. These include:
- Multi-asset Funds
As the name suggests, multi-asset funds invest in funds investing in multiple assets. For example, multi-asset funds may invest in an equity fund and a debt fund. While the equity fund invests in stocks, the debt fund invests in debt securities like commercial papers, treasury bills, etc.
The objective of FoFs is to enhance exposure to a range of asset classes, providing easy diversification. All the fund manager of the FoF needs to do is pick up funds investing in different underlying securities.
- International FoFs
International FoFs invest in mutual funds that invest in global companies. In other words, the fund in which an international FoF invests holds stocks of foreign companies in its portfolio. If you invest in an international FoF, in reality you are investing your money in multinational companies. If you want to do it otherwise, there are a lot of hassles and paperwork involved, which is eliminated otherwise.
- ETF Funds of Funds
ETF fund of funds invests in exchange-traded mutual funds that track indices like the BSE Sensex or Nifty 50. Note that exchange-traded funds or ETFs track a particular index and own securities in the same proportion as the index. ETFs are passively managed funds, and unlike active mutual funds, their aim is not to generate alpha.
If you want to invest in passive mutual funds in an easy and hassle-free manner, ETF Fund of Funds can be a prudent investment option.
- Gold Fund of Funds
Since time immemorial, Gold has acted as a hedge against inflation. However, investing in physical Gold may not be wise as it has purity and storage issues. Gold ETFs are a better option since they weed out purity and storage issues. Investing in Gold Fund of Funds gives you exposure to Gold ETFs and allows you to invest in the yellow metal hassle-free.
Why Should Businesses Invest in Fund of Funds?
Investing company money in an FoF augurs several benefits for businesses. Some of the prominent ones include:
- Easy Diversification
Diversification is a core tenet of investing. It reduces risk and ensures gains don’t take a hit during fluctuations. While mutual funds offer diversification, investing in different mutual funds may not be feasible. Investing in too many funds makes a portfolio bloated and makes it difficult to track returns.
On the other hand, investing in an FoF allows you to invest in a range of mutual funds with different underlying schemes and objectives with a single click.
- Opportunity to Invest in Global Behemoths
Investing money in global companies gives it more chances to grow. At the same time, it ensures that gains are the performance of your portfolio is not dependent on domestic factors and performance of the rupee. With international funds, you can leverage the growth of foreign companies to augment your wealth.
- Benefit from Investment Styles of Different Fund Managers
Different fund managers have different investment styles. While some have an aggressive approach, others may have a wait and watch approach. Investing in different mutual funds to take advantage of various fund management styles can be a tall order. However, investing company money in fund of funds can help you benefit from the investment style of different managers.
In a nutshell, the collective investment strategy enables you to invest in some funds. During rebalancing, you don’t incur any capital gains tax.
The Final Word
As evident, fund of funds can be a good starting point for investing business cash as it provides you the much-required diversification, thus reducing the risk of your investment. With a FoF, you can invest in top mutual fund options on the go.
If you seek to invest in top FoFs, Shootih can help you. India’s first business wealth management platform, it allows you to invest in company’s idle cash in FoFs as per your risk and investment horizon. To invest in top Fund of Funds with Shootih, book a call with our product manager today.
Disclaimer: Mutual fund investments are subject to market risks, please read all scheme-related documents carefully
The content of this blog is not intended to serve any professional advice or guidance and Shootih takes no responsibility or liability in whatsoever manner for any investment decisions made by the readers of this blog or other blogs. Readers should seek independent professional advice before making any investment decision based on the information provided on this website.
