If you want a higher return on your investment than other conventional investments without investing directly in equities, you can invest in the ‘Fund of Funds’ category of mutual funds. It has given returns of up to 51% in the last 1 year. In this article, we will tell you about the Fund of Funds.
What is a ‘Fund of Funds?
Fund of Funds is one of the schemes of mutual funds that invest in other mutual fund schemes. But it is not limited to index funds and exchange-traded funds (ETFs). For example, if the fund manager wants to invest in gold, then he will invest money in a gold scheme investing in gold. This means that a fund of funds is a mutual fund scheme that invests in other schemes. A fund manager is not obliged to invest money in any one scheme. While Fund of Funds does not hold shares or bonds of the company, Fund of Funds holds units of other schemes. A Fund of Funds manager can invest in multiple schemes of his fund house or other fund houses.
Why it gives higher profits?
The biggest advantage of investing in this is small investors who are unable to invest in different investment options due to a lack of funds. They can diversify their portfolio in a small amount through this scheme. Hence, the chances of earning more return on investment increase.
Categories of Fund-of-Funds
Fund of Funds can be of three types. One that invests in equities. Another one invests money in debt funds. Third category makes investments in international markets. These three types cover almost all asset classes.
Tax to be paid on profit
Earnings from equity funds attract short term capital gains tax if investments are redeemed in less than 12 months. It is levied up to 15% on earnings as per the existing rules. If your investment is for more than 12 months, then it will be considered as Long Term Capital Gains and 10% interest will be charged on it.
No need to invest in a lump sum
Instead of investing all money in mutual funds, one should invest through a Systematic Investment Plan (SIP). Through SIP, you invest a fixed amount every month in it. This further reduces the risk as it is not affected much by market volatility.
Suitable for whom?
For those people who want to diversify their portfolio by investing less money in mutual funds, it will be right to invest in it. Apart from this, it is also suitable for those who do not have much knowledge about mutual funds, as a world-class fund manager handles your money. This also reduces your risk.
Also read: Savings or Investing- What Is Best To Do In 2021?