As a rule of thumb, a mutual fund allows scores of investors to pool in their resources and invest in a range of stocks and debt instruments. When regulatory and other concerns bind AMCs (asset management companies) to stay confined to only a set of asset classes, they can even offer funds which, in turn, invest in other funds, taking diversification one notch higher.
These funds make the lives of investors easy as they do not need to invest in multiple funds for exposure to different asset classes or sectors. They can get a fairly wide exposure, which is usually not possible through one mutual fund.
Some recent launches
Lately, some AMCs have even started offering FOFs to allow investors to invest money in US markets. For instance, ICICI Prudential Mutual fund launched Nasdaq 100 Index Fund in September 2021 to give exposure to 100 largest non-financial companies listed in Nasdaq.
On the same lines, Aditya Birla Sun Life in October 2021 introduced Aditya Birla Sun Life Nasaq FOF to give access to global, top performing brands in innovative themes. It also enables diversification to overseas stocks. This fund has a positive outlook for the non-financial sectors with technological disruption.
There are enormous opportunities, says the AMC, in the new-economy areas such as e-commerce, payments and disruptive technologies.
Motilal Oswal Mutual Fund had also launched a fund of funds to replicate the NASDAQ 100 index in November 2018. The fund houses assert that these companies are missing from Indian stock markets, thus calling for a need to offer fund of funds which can allow domestic investors to get exposure to disruptive technologies.
“Investors with moderate to high-risk profiles, or those who have built reasonable allocation in India based equities may look at diversifying their portfolio in International Funds. One may consider an allocation of up to 10 percent of their portfolio in such funds,” says Harshad Chetanwala, Co-founder, MywealthGrowth.com
Broadly speaking, there are various categories of fund of funds:
International fund of funds: These funds invest in the overseas markets such as Aditya Birla Sun Life Nasdaq 100 FOF. Through these FoFs, domestic investors can take part in the rally of overseas markets.
Multi manager fund of funds: These funds comprise several mutual funds across themes and sectors. As one would expect, they are managed collectively by several fund managers, each focussing on a particular asset.
Asset allocation funds: These funds comprise a wide mix of assets comprising equity, debt and commodities, among others.
In summary, a fund of funds forays into a territory where a normal fund fails to enter. They make the lives of investors easy and convenient by allowing them to keep track of one fund, instead of a bouquet of funds across themes and sectors.