What are Fund of Funds type of Mutual Fund schemes

Every individual aspires to achieve financial stability and financial freedom in their lives. But if you want to improve your existing financial situation then you need to be effective with financial planning. The main idea behind financial planning is to identify your long term and short term goals. When you know your goals, investing in financial schemes might become easier. Every individual has a different financial goal. For example an individual who is in his early or mid 40s might want to save enough money for his or her sunset years. This is a long term goal and one may need to save up to at least Rs. 25 lakhs to Rs. 30 lakhs. For such a long term goal, one may require to invest in equity mutual funds or solution oriented funds that are supposed to offer long term capital gains. On the other hand, someone who has just started working and is young might have a short term goal of buying a new car or a medium term goal like saving for his or her wedding. For such goals, one may consider investing in debt or balanced funds using SIP app.

The reason why mutual funds have gained popularity over the past few years is because of their potential to offer investors with decent capital gains. In case you aren’t aware about mutual funds, let us brief you about the same:

What is a mutual fund?

A mutual fund is a professionally managed funds where an AMC (Asset Management Company) collects money from investors sharing a common investment objective and invest this pool of capital raised in stocks and other money market instruments including debt instruments, government securities, certificates of deposits (CoDs), treasury bills, etc. depending on what objective the scheme wishes to achieve. However, there is no guarantee that a mutual fund will always be successful in achieving its investment objective by outperforming it’s benchmark. It is said that the performance of a mutual fund depends on the performance of its underlying assets and the sectors and industries in which they invest.

Mutual funds are categorized based on their unique attributes like risk profile, investment strategy, asset allocation, scheme objective, etc. Of the several mutual fund schemes available, fund of funds (FoFs) has gained momentum among seasoned mutual fund investors in the recent past.

What is Fund of Funds ( FoFs)?

According to SEBI, FoF is supposed to invest at minimum of 95 per cent of its total assets in the underlying fund. It is an open ended scheme that invests a major portion of its assets in the underlying fund. While most mutual funds invest in stocks, bonds and other marketable securities, these funds invest in other mutual fund schemes. Because the FoF scheme invests in units of other mutual funds, such type of investment is also referred to as multi-manager investment.

Since FoF Schemes invest in multiple mutual funds, they may offer diversification and balance the risk of the mutual fund portfolio. So if you are someone who has a small budget but wishes to invest across multiple assets, a FoF scheme might offer you that option. A FoF scheme may or may not invest its underlying assets in the mutual fund scheme of the same fund house.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.