One other variant on this class is a FOF which supplies publicity to several types of ETFs inside a single portfolio.

For an investor seeking to take publicity to equities, there are a selection of funding automobiles to select from. One such funding possibility is the Fund of Funds (FOF). A FOF is a mutual fund that primarily invests within the items of one other Mutual Fund scheme. Primarily, it’s an funding technique of holding a portfolio of different funding funds fairly than investing straight in shares, bonds, or different securities. The underlying investments may very well be the items of mutual fund schemes both from the identical fund home or different fund homes.

Sorts of FOFs:
There are all kinds of FOF choices out there. The underlying could be solely equities or it may very well be a mixture of assorted asset courses.

1) Asset Allocation FOF
Because the title suggests, for asset allocation such a FOF may have funds investing in fairness, debt, and gold as its underlying belongings. For instance, ICICI Prudential Asset Allocator Fund. If you’re an investor in search of a one-stop resolution in your asset allocation wants, chances are you’ll take into account a FOF which offers with asset allocation.

2) Worldwide FOF
The opposite broadly common class of FOF has worldwide investing as its underlying theme. The fund supervisor right here invests in Indian mutual fund schemes which make investments throughout varied international markets or will put money into mutual funds working in goal markets. For instance, ICICI Prudential International Benefit Fund. Right here, the fund includes funds which are India-based and make investments throughout each developed and rising markets.

3) Gold-based FOF
A Gold FOF will put money into mutual funds which put money into the yellow steel such because the Gold ETF. For instance, ICICI Prudential Common Gold Financial savings Fund (FOF) invests within the ICICI Prudential Gold ETF.

4) ETF FOF
Such a FOF may have ETFs as its underlying. Over the past couple of years, the ETF house has exploded with quite a lot of thematic/sectoral and sensible beta ETFs. The FOF construction is created such that traders even and not using a Demat account can entry the ETF. (Demat account is obligatory for investing in ETFs). For instance, ICICI Prudential Nifty Low Vol 30 ETF Fund of Funds (FOF). This FOF invests in ICICI Prudential Nifty Low Vol 30 ETF that replicates the Nifty 100 Low Volatility 30 Index in the identical proportions. The low vol index is comprised of the regular least risky shares out there and endeavours to supply larger risk-adjusted returns. On this case, the FOF portfolio consisted of a single ETF.

One other variant on this class is a FOF which supplies publicity to several types of ETFs inside a single portfolio. One such fund is the ICICI Prudential Passive Technique Fund (FOF) which actively manages the market cap, sector/thematic, and factor-based allocation via ETFs. As of Could 2021, the portfolio consists of ETFs primarily based on indices akin to S&P BSE 500, Nifty, IT, and BHARAT 22.

5) Debt-based FOF
If you’re an investor seeking to allocate in direction of debt however are not sure which class of mounted earnings mutual fund is appropriate for you, then this FOF can come in useful. Right here, the fund supervisor relying on the evolving macros will allocate corpus throughout classes of funds which are more likely to take advantage of from the prevailing market state of affairs.

6) Fairness-based FOF
Much like debt-based FOF, an fairness FOF may have publicity to quite a lot of fairness mutual funds with various funding types inside a single FOF. For instance, The portfolio of ICICI Prudential India Fairness FOF consists of eight funds from 5 completely different fund homes. Every of those funds is exclusive by way of the administration type and covers a large spectrum of shares throughout market capitalisation.

Benefits of FOF

1) Entry regardless of restricted capital
By FOFs, traders even with restricted capital get entry to speculate throughout asset courses akin to equities, debt, liquid funds, gold, commodities, and particularly worldwide indices. In any other case, accessing every of those asset courses individually may show to be cost-intensive for a lay investor. Equally, if a person want to put money into some worldwide market, the associated fee related could be virtually prohibitive in nature when one considers the foreign money fluctuation facet as properly. Now with FOF, an investor needn’t fear about such challenges.

2) Diversification
By a single FOF, an investor will get the chance to diversify inside one distinctive asset class or a number of asset courses primarily based on the FOF chosen.

3) Profit {of professional} experience
When investing in a FOF, an investor will get the advantage of the portfolio being managed by an expert fund supervisor. This assumes significance particularly throughout occasions of rebalancing. As a lay investor, one might not be capable to catch the change in market pattern or reply rapidly relying on the change in market situations, a deficiency that will get addressed via an expert fund supervisor.

As FOFs take publicity to a number of funds, the general price/expense ratio tends to be typically larger than particular person mutual funds however the prices have regulatory higher limits and therefore it doesn’t pose a roadblock. Within the case of ETF FOF, the bills related are typically comparatively lesser because the underlying price of ETF tends to be cheaper. These ETFs present wonderful flexibility to the traders by way of the well-diversified portfolio that too at a lesser price.

In relation to taxation, FOF is handled as a non-equity fund. This implies the brief time period is outlined as as much as three years (36 months) and the long run is three years plus. If the items are bought after 36 months, a long-term capital acquire tax of 20% with indexation is charged. Nonetheless, it could be famous that the FOFs with a minimal of 95% in fairness ETFs are taxed as per Fairness taxation.

To conclude, in case you are an investor with restricted know-how of assorted asset courses and their functioning, investing in a FOF that meets your funding requirement generally is a sensible place to begin. It’s because it permits an investor to put money into a diversified portfolio and over the long run assist generate higher risk-adjusted returns.

by, Chintan Haria, Head- Product Improvement & Technique, ICICI Prudential AMC