Fund of Funds (FoFs) are a specialized type of mutual fund that invest in other mutual fund schemes rather than directly purchasing stocks, bonds, or other securities. According to reports from Mint, these funds allow investors to gain exposure to a diversified portfolio through a single investment vehicle. As per SEBI regulations, FoFs are required to invest at least 95% of their assets in the underlying mutual fund schemes they are designed to track or target. The funds provide convenience by offering exposure to multiple mutual fund schemes through a single investment, making portfolio diversification simple and convenient for investors.
There are several categories of FoFs available to investors, each serving different investment objectives. Domestic equity-oriented FoFs invest in multiple equity mutual fund schemes within India, spreading investments across different equity funds such as large-cap, mid-cap, small-cap, flexi-cap, or sectoral funds/ETFs. Domestic debt-oriented FoFs invest in a mix of debt mutual fund schemes like liquid funds, corporate bond funds, and gilt funds within India. Domestic hybrid FoFs invest in a combination of equity and debt mutual funds or track specific hybrid funds. Gold funds/Silver funds primarily invest in gold ETFs or silver ETFs rather than physical metals, offering tax-efficient exposure without requiring a demat and trading account. Overseas FoFs invest in international mutual funds or ETFs, providing Indian investors exposure to global markets and diversification beyond the Indian market.
FoFs operate differently from Exchange-Traded Funds (ETFs) in several important aspects. As reported by Mint, ETFs directly hold a basket of securities in the same weightage as the index they track, while FoFs invest in a portfolio of different mutual funds or a single ETF. ETFs are passively managed and traded on stock exchanges throughout the day at market prices, while FoFs are typically actively managed and their Net Asset Value (NAV) is disclosed by the fund house at the end of the day. ETFs offer higher liquidity as they can be bought or sold at any time during market hours, while FoFs are transacted at end-of-day NAV. ETFs usually have lower expense ratios due to passive management, whereas FoFs tend to be more expensive because of a double layer of fund expenses.
Recent performance data reveals varying returns across different FoF categories. Global equity FoFs have shown mixed results with some funds delivering 18.23% returns over 3 years and 14.54% over 5 years, while others have experienced negative returns of -1.81% and -7.91% respectively. Infrastructure FoFs have demonstrated stronger performance with 10.92% returns over 5 years and 10.40% over 3 years. Australian small-cap FoFs have shown resilience with 9.10% returns over 5 years despite short-term volatility. Gold FoFs have delivered consistent returns of 10.79% over 5 years and 13.09% over 3 years, offering stable performance in volatile markets. The data indicates that FoFs can provide attractive risk-adjusted returns over medium to long-term periods, with some funds achieving 9% p.a. net of fees over economic cycles.
