WHAT ARE FUND OF FUNDS?
Fund of Funds is an investment strategy in which a fund invests in other mutual funds. This type of investment is called multi-manager investment. It invests in a portfolio that has different underlying assets instead of investing directly in stocks, bonds, and other securities. The fund of funds is also known as “fettered” which means it invests only in funds managed by the same investment company.
How Do Fund Of Funds Work?
This kind of strategy aims to achieve a broad diversification and appropriate asset allocation by investing in a variety of fund categories. Interestingly, fund of funds was brought into the limelight by a $ 1 million bet between Warren Buffet and hedge fund manager Protégé Partners. Buffet bet that S&P 500 Index fund would beat the performance of 5 funds of funds picked by Protégé Partners over a period of 10 years, after fees. So far it looks like Buffet might be winning the deal.
The Fund of Funds attracts small investors who want to get exposure to few risks compared to investing directly in securities. The most common example of Fund of Funds is target date mutual fund. For example, TATA’s target date mutual funds pool of investors capital and invest in other TATA’s funds. These kinds of funds are common in hedge funds. These have a high minimum investment which exceeds $ 1 million or more. Hence, investors who cannot pull enough money to invest in such high amounts invest through a fund of funds similar to how SIPs help you to invest in equities starting from 500/month.
Features Of Fund Of Funds?
Below are some of the significant features of the fund of funds:
• They offer a diversification of investment
• It reduces the volatility of funds and provides above average return on the investment
• It is a huge collective investment scheme which provides investors with many options to invest in
• It is easy to keep track of funds
• Consulting a fund manager is mandatory as it requires some professional knowledge about the stock market.
What Are The Advantages of Fund of Funds?
Investing in Fund of Funds allows an investor to test the investing in professionally managed funds before going for individual funding. Most of the Fund of Funds require a formal process before investing. Mentioned below are some of the advantages of fund of funds:
- It also allows the investor to invest with a limited capital which would otherwise not be accessible to him traditionally.
- The risk of investment is lower due to diversified investment in funds. Hence, the below par performing stocks will not affect your entire portfolio.
- The investment is made through various hedge funds which increase the potential for good returns.
- A professional manager works to capture the best performing funds which increase the potential for higher returns.
What Are The Disadvantages of Fund of Funds?
Despite having some eye-catching advantage the Fund of Funds has its own set of disadvantages:
- Fund of Funds investment comes with high investment fees. Over a period of time, the burden of additional fees makes it difficult to provide good returns.
- These funds come with limited redemption facility. This means that the investor is unlikely to redeem his investment in liquid cash whenever they wish.
- Fund of Funds has a complex form of tax structure. They have to pay tax on the capital gain even if recovered in cash.
An investment with Fund of Funds is a good way to enter the investing world if you are an amateur investor. Over a couple of years, more people are seen investing in a fund of funds. This has led to a faster growth of this scheme of investment. The rapid changes in the economy as well as technology have provided a lot of attention as it provides security as well as accessibility to investing right from your smartphone. Experience the change by downloading the Angel Bee app today!
