What is Fund of Funds? How Fund of Funds works in India?

A Fund of Funds (FoF) is a type of investment vehicle that invests in a portfolio of other mutual funds or exchange-traded funds (ETFs), rather than investing directly in individual securities or assets. The primary purpose of a Fund of Funds is to provide investors with diversified exposure to different funds and asset classes.

Here's how a Fund of Funds works in India:

    Portfolio Construction: The fund manager of a Fund of Funds selects a combination of mutual funds or ETFs to create a portfolio. These funds can be from various asset classes, such as equity funds, debt funds, or hybrid funds, depending on the investment objective and strategy of the FoF.

    Diversification: The key advantage of a Fund of Funds is diversification. By investing in a range of funds, the FoF spreads the investment risk across different underlying assets, fund managers, investment styles, and market sectors. Diversification can help reduce the impact of a poor-performing fund on the overall portfolio.

    Asset Allocation: The FoF manager determines the allocation of assets among the selected funds based on the investment objectives and risk profile of the FoF. The asset allocation may be adjusted over time to adapt to changing market conditions or to maintain the desired risk-return profile.

    Active Management: The FoF manager actively monitors and manages the portfolio of funds. This involves conducting research and analysis to select the underlying funds, monitoring their performance, and making adjustments to the portfolio when necessary. The objective is to optimize the risk-adjusted returns of the FoF.

    Expense Ratio and Fees: Fund of Funds has its own expense ratio, which includes the management fees and expenses associated with managing the portfolio. In addition, investors in a Fund of Funds also bear the expense ratios of the underlying funds in which the FoF invests.

    Investor Convenience: Fund of Funds offers investors the convenience of accessing a diversified portfolio of funds through a single investment. This eliminates the need for individual investors to research, select, and manage multiple funds on their own. Investors can achieve diversification and exposure to different asset classes with one investment.

    Returns and Risk: The returns of a Fund of Funds are influenced by the performance of the underlying funds. The risk and return characteristics of the FoF depend on the asset allocation decisions, the performance of the selected funds, and the diversification benefits achieved.

Fund of Funds in India is regulated by the Securities and Exchange Board of India (SEBI). SEBI sets guidelines and regulations to ensure investor protection, transparency, and fair practices for FoFs.

Before investing in a Fund of Funds in India, investors should carefully consider factors such as the FoF's investment objectives, historical performance, expense ratio, diversification strategy, the reputation and track record of the fund house and manager, and any associated tax implications.

It's important to note that investing in a Fund of Funds involves indirect investing in other funds, and investors should be aware of the risks associated with the underlying funds and the potential impact of double-layered expenses due to the fees of both the FoF and the underlying funds.