When to opt for Funds of Funds?

By BankBazaar | April 28, 2011

FoFs takes your Mutual Fund investments diversification a step further by spreading the risk across 5-6 different funds. Again, the returns are not as high as those from the best diversified equity funds, but they are better than the average fund.

Here are the Do’s and Don’ts

Do’s:

  • Choose this option only if you do not have the idea to choose a good mutual fund and lack the time to track each MFs performance.
  • If you wish to diversify your investment across 4-5 Fund houses, this can be the right option.
  • If you are risk averse, but wish to invest in global stocks, but not directly, FoF, is the right fund option for you.

Don’ts:

  • If you understand the working of Mutual Funds, and can pick the best schemes on your own.
  • If you do not want to get a part of your returns scrapped off due to higher costs or lose out on your tax benefits.
  • If you do not want to ignore the tax benefits on your equity mutual funds.
  • If you do not want to pay an extra 0.75% every year as the fund management fee.

These are some of the factors you need to keep in mind before you choose to decide whether you need to opt for FoFs or not. Do factor in your financial goals so that your investments can be set right in the desired direction. Invest in short term funds if your financial goal is to prepay your home loan or personal loan in the next 5-6 years. And fix a long term investment for your long term financial goals like saving for retirement.

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