Investor Corner/The asset classes/Mutual Fund Core Concepts
2.3.14 Fund of Funds (FoF)
A Fund of Funds invests in other mutual funds rather than directly in stocks or bonds. It adds a further layer of cost, but it can be a convenient way to access certain asset-allocation or international strategies.
A fund that invests in other funds
Instead of holding individual stocks and bonds directly, a Fund of Funds builds its portfolio out of units of other mutual funds, which may be run by the same AMC or by a range of different AMCs. This lets a single fund offer diversified exposure across strategies, asset classes or geographies that might otherwise require an investor to research and buy several separate funds themselves.
The extra cost layer
Because a Fund of Funds holds other funds, which each already carry their own expense ratio, the overall cost to the investor typically includes an additional layer of fees at the Fund of Funds level itself. This layered cost structure is the main trade-off to weigh against the convenience and diversification such a fund is offering.
Where the structure is genuinely useful
Fund of Funds structures are commonly used for international investing, since they let an Indian investor access overseas markets through a single domestic purchase rather than dealing with foreign accounts directly. They are also used for multi-asset or dynamic allocation strategies, where the underlying mix between equity, debt and gold funds shifts based on market conditions.
How PriLytics helps. PriLytics looks through Fund of Funds and hybrid schemes to show the real underlying allocation, so layered fund structures do not hide what you actually own. See true asset allocation.