A fund of funds (FoF) is a type of mutual fund that employs its collective resources to invest in various other types of mutual funds available in the market. Alternatively, this mutual fund also facilitates investment in hedge funds. The portfolios of fund of funds mutual funds entail varying degrees of risk, determined by the manager’s primary objective. If the manager aims to achieve the highest possible yields, the focus will be on mutual funds with higher net asset value (NAV), even though they come with a higher level of risk.
On the other hand, if stability is the primary goal, low-risk instruments will be acquired using the pool of financial resources. These mutual funds offer the flexibility to invest in both domestic and international funds at the discretion of the asset management company, thereby enhancing the diversification of the fund of funds. A key characteristic of such mutual funds is that they are overseen by highly skilled professional portfolio managers. This domain expertise contributes to accurate market predictions to a certain extent, thereby minimising the likelihood of incurring losses.
Managing Fund of Funds Mutual funds allocate their investments across various securities, including both equity and debt instruments. They engage in the purchase of company stocks and debt papers on behalf of their investors. On the other hand, fund of funds directs its investments into other mutual funds. In this context, the fund manager has the flexibility to invest in a single fund or multiple funds from different fund houses, contingent upon the underlying investment strategy. Fund of funds operates as actively managed funds, where the fund manager frequently reallocates underlying funds to capitalise on market fluctuations.
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