MOST INVESTORS KNOW about mutual funds and usually invest in either equity or debt instrument-based funds. But only a few investors are aware that there exist funds which invest in other mutual funds (MFs) or exchange traded funds (ETFs). Such types of funds are known as Fund of Funds (FoF). Let us try to understand what are the salient features of FoF, associated risks and what kind of investors should invest in such funds.
They are a type of mutual fund which utilise their pool of resources by investing in various kinds of mutual funds in the market. Investing in FOFs provides a significantly higher degree of diversification as these invest in multiple schemes with various asset classes. So, generally FOFs are protected against both high volatility and short-term fluctuations.
Investment amount in FOF could be similar to that of a typical MF investment. Investors can also opt for a systematic investment plan (SIP) scheme. Thus, they have all the benefits such as compounding effect, averaging out, etc. As FoF invests across the different schemes, thorough due diligence is carried out by professional fund managers.