Wednesday, 26 January 2011

Fund of Funds (FOF) is the best option for Mutual fund investors.

You must have heard a lot about mutual funds and most of our readers are already investors of mutual funds. As you are aware that mutual funds are the easiest way of invest in equity market, bonds and other money market instruments. Portfolio Diversification, expert professional management, low transaction cost, low risk factor, high liquidity .safety and convenience to handle etc., are some of the advantages of mutual funds. But there are some disadvantages also in mutual fund investing. The main disadvantage is that the difficulty in choosing a perfect and suitable mutual fund among plenty of mutual funds available in the market. The solution is fund of funds.

Fund of funds is also a mutual fund, but invest the pooled money of investors in selected mutual funds by the expert fund managers to get more profit from best performing mutual funds. Normally mutual funds invest in shares and other money market instruments. But fund of funds invest in different mutual fund schemes to get maximum advantage. It reduces the investor’s difficulty to choose the right mutual fund.

This fund of fund reduces the risk of investing in various low performing mutual funds. It helps the investor to get more diversity of their investment. All these diversities are unified in fund of funds. The investor should not switch over from mutual funds to funds and can reduce the difficulty of screening all mutual funds he has invested to know the performance of his investment. As he could reduce the number of schemes he can reduce the cost of investment also. The investor can get benefited from top level mutual funds which can be invested only by institutional investors or large scale investors. The investor can get the expert performance of various fund managers where the investments are done through fund of funds.

There are certain disadvantages also in fund of funds. The main disadvantage is that the cost may be more than other mutual funds because it has a hidden cost of other mutual funds which the fund of fund invested in. The possibility of invest in same shares repeatedly through the various mutual funds subscribed by fund of funds which may invest in same stocks. The tax implication of fund of funds is same as the taxability of debt funds, not the taxability of equity funds, even if the mutual funds invested by fund of fund are equity schemes.

AIG World Gold Fund, DSP BlackRock World Gold Fund, Quantum Equity fund of fund, Mirage Asset China Advantage Fund (regular plan) and Kotak Equity FOF are some examples of fund of funds

If you are not able to choose the right mutual fund, fund of funds is the best option for you. The expert fund managers will choose for you and you can enjoy the best fruits from the mutual funds.

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