Everything You Need Know About Fund Of Funds
Dalal Street Investment Journal|August 02, 2021
The FOFs is best suited for small investors who are not willing to take higher risk or investors with lower financial resources but who are willing to have a diversified portfolio

In India, the mutual fund industry has been steadily growing year on year. As per the Association of Mutual Funds of India (AMFI), the asset under management (AUM) of all mutual fund schemes has risen by 51.24 per cent i.e. from Rs 22.26 lakh crore in March 2020 to Rs 33.66 lakh crore as of June 2021. Mutual funds offer various types of schemes to their investors such as equity-oriented schemes, debt-oriented schemes, index funds, etc. What if an investor wants to invest in a single fund and yet wants exposure to all the schemes? The answer to the question is ‘Fund of Funds’ (FOFs). Fund of Funds is a pooled investment fund that invests in other types of funds.

In other words, FOFs invests in other mutual funds rather than investing directly in stocks, bonds or other securities. This way the Fund of Funds invests in a variety of asset classes by investing in mutual funds offering various types of schemes. In India, FOFs has been growing rapidly since 2020. As per AMFI data, there has been an increase in AUM by almost six times since June 2015 as of June 2021 i.e., from Rs 5,781 crore to Rs 34,500 crore. In India, as of June 2021 there are 57 FOFs schemes (domestic) available. The following graph depicts the trend of AUM of FOFs (domestic).

Defining Fund of Funds

Fund of Funds scheme is a scheme wherein the assets are invested in the existing schemes of the mutual funds. This type of investment scheme is also referred to as multi-manager investment. These schemes offer investors the opportunity to diversify their portfolio by spreading risk across various asset classes. These schemes are better suited for small investors or investors who have small capital but are willing to diversify their portfolio against distinct asset classes. This enables them to earn maximum returns at minimal risk.

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