Fund of funds is a Mutual Fund which utilises its pool of resources to invest in various other kinds of mutual funds available in the market. Alternatively, investment in hedge funds can also be made via this Mutual Fund.
Fund of funds MFs have portfolios of varying degree of risks, depending upon the main aim of the manager. If the primary target of the portfolio manager is to earn the highest yields possible, then mutual funds having higher NAV will be targeted, even though it is associated with a higher degree of risk. However, if the primary aim is stability, low-risk instruments will be acquired using the pool of financial resources obtained.
These mutual funds can be used to invest in both in domestic as well as international funds, as per the discretion of the asset management company. This increases the diversification of the fund of funds.
The essential characteristic of such Mutual Funds is that they are maintained by highly trained professional portfolio managers. This ensures accurate market predictions to a certain extent, minimizing the chances of incurring a loss.
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Text: Prathmesh Kher, Sify Finance
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