Mutual Fund Unlocked: Fund of Funds

The Indian mutual fund industry offers various investment avenues to the investor. In the recent AMFI data disclosure, we have seen that the folios of the fund of funds have increased. So let us just explore these funds.

A Fund of Fund(FOF) is nothing but a mutual fund scheme which invests in other equity, debt, gold or foreign mutual funds. These funds can invest either in domestic mutual funds or in international funds. These funds could be investing in separate schemes from the various categories such as equity, debt or gold or in a combination of these assets. When these funds invest in a foreign fund or offshore fund, they become an international fund.

Let us just look at some popular fund of funds

Gold Funds- These funds utilise the fund of fund mode to invest in gold. They do this by investing in gold ETFs, typically from their own fund house as to invest directly in a gold ETF investor would require a Demat account which becomes a tedious job for him. So gold funds ease investors to invest in gold without a Demat. Moreover, in these fund of funds, investors can easily invest through the SIP route just like they would with any other mutual fund scheme.

Asset Allocation Funds: The asset allocation fund of funds seek to provide the investor with one fund that is diversified across different schemes with respect to different asset classes. The dynamic funds are asset allocation funds which shift the equity and debt exposure as per market movements. That is when the market metric turns high, the fund would reduce its exposure to its equity funds and shift it in its debt fund holdings and vice versa. Rest of the asset allocation fund of funds invest in a blend of equity and debts. These funds are often characterized as being aggressive, moderate or conservative with respect to the asset allocation between equity and debt funds. Usually, most of the fund of funds invest in their own schemes but there are some multi-manager fund of funds which invest in schemes of other fund houses as well.

International Fund of funds

Not all investors or the fund houses are able to track the global markets hence some of the fund houses choose to invest in an existing foreign fund for providing a route for Indian investors to invest in foreign equity funds. These funds allow an investor to invest and redeem in local currency. These funds can invest in a specific country or specific themes such as US, China or Europe or across countries (global fund) or in a specific theme such as commodities, agriculture or energy and so on.

Even though these funds provide exposure to foreign stocks, they carry dual risks the market risk in that specific country or the theme risk and the currency risk as local currency will be subject to conversion volatility when the fund deploys money in such foreign markets.