Funds of Funds are a type of mutual fund investing in other mutual fund schemes. It is also known as a multi-manager investment. Instead of directly investing in stocks or bonds or other securities, a fund manager makes a portfolio of mutual funds. The underlying fund for FOFs is either from the same fund house or other fund houses. Funds of funds aim to achieve sound diversification and appropriate asset allocation by investing in a variety of funds across different categories.
This category of funds attracts small investors with low-risk appetite and also with access to a range of different asset classes. Thus these funds aim to ensure lower volatility of funds and aggressive returns for its investors. FOFs are actively managed, and they undergo frequent reallocation of underlying funds to stay up to date with market fluctuations. They offer tax-friendly rebalancing of the portfolio. The FOFs offered in India belong to the same fund house.
Fund of funds is a good bet for small investors who do not wish to take too much risk. The diversification of funds helps with reducing the risks to a certain extent. This is also a great medium of investment for an investor with small amounts of funds available for investment each month. In addition to this, investors who have an investment horizon of five years or more may think of investing in this fund.
The minimum investment varies from scheme to scheme. It could range between Rs. 100 to Rs. 5,000.