There are three categories in the AIF: category 1, category 2, and category 3.
Investments in start-ups, early-stage ventures, and other industries with significant growth potential are made by the Category I AIF. Funds that do not come within categories I and III, such as debt funds or private equity funds, are included in category II AIF.
Category III AIFs include hedge funds and private investments in public equity.
Here we explore only the Fund of Funds Under AIFs:
What is a Fund of Funds?
An investment strategy known as a fund of funds (FoF) involves maintaining a portfolio of other investment funds as opposed to making direct investments in stocks, bonds, or other securities. The units of another mutual fund scheme are the primary investment of a FOF plan. Multi-manager investment is a common term used to describe this kind of investment.
Fund of Funds: Types
– Funds for asset allocation: These funds are made up of a variety of assets, including securities made up of debt instruments, equity, precious metals, and more.
– Gold-backed funds: Investing in various mutual funds that deal mostly in gold securities is known as gold funds.
– International fund of funds: The international fund of funds targets mutual funds that operate in other nations.
– Fund of funds with multiple managers: The most prevalent kind of mutual fund available on the market is this one. A variety of professionally managed mutual funds with varying portfolio concentrations make up the asset base of such a fund.
– ETF Fund of Funds: One of the most common financial tools in the nation is a fund of funds that includes exchange-traded funds in its portfolio.
Fund of Funds: Who Should Invest?
The primary goal of the top fund of funds is to maximise returns by investing in a diverse portfolio with low risk. People who have access to a limited amount of money that they can save for a longer period can select such a mutual fund, and because the portfolio of such funds includes a variety of mutual fund types, it also guarantees access to high-value funds.
Ideally, investors with lower liquidity requirements and comparatively fewer resources can select the top fund of funds available in the market, which allows them to earn maximum returns at low risk.
Fund of Funds: Advantages
Investing in a fund of funds offers several advantages, including:
Diversification:
Funds of funds target top-performing mutual funds in the market, each specialising in a specific asset or fund sector. This ensures gains through diversification, as underlying portfolio variety optimises both returns and risks.
Managers with professional training:
The fund is run by professionals with years of expertise and extensive training. Through complex investing techniques, such portfolio managers guarantee high payouts through accurate analysis and well-calculated market predictions.
Minimal needs for resources:
It is simple for a person with little money to invest in the best fund of funds to increase profits. There are also monthly investment plans available when selecting a fund of funds to invest in.
Fund of Funds: Restrictions
Expense ratio
Because fund of funds mutual funds have higher management costs than regular mutual funds, their expense ratios are higher. Added fees include principally choosing the correct item to invest in, which goes on shifting occasionally. This expense equals a large amount and is deducted from the annual returns provided by the asset management organisation.
Tax
An investor is only required to pay taxes on a fund of funds when the principal is redeemed. However, depending on the investor’s yearly income and the investment period, both short-term and long-term capital gains are eligible for tax deductions during recovery. It should be mentioned that since the issuing fund company bears the burden, the dividend received on the investment is not taxable.
