What are debt fund of funds?

Not everyone wants to expose their finances to market volatility. That’s because you should have a very high risk appetite to invest in market linked schemes like equity funds. There is a common misconception among Indian citizens who are convinced that if they invest in mutual funds, they will definitely lose their money to market volatility. What they do not understand is that not all mutual funds invest in the stock market. Every mutual fund scheme has a different investment objective which it aims at achieving over the long term by investing in a diversified portfolio of securities. The performance of a mutual fund depends on the performance of all its underlying assets.

If you do not wish to invest in equity schemes but still wish to earn capital appreciation by investing in mutual funds, you can consider adding debt funds to your investment portfolio.

What are debt mutual funds?

Unlike equity funds who predominantly invest in equity and equity related instruments, debt funds are open ended schemes who invest majority of its investible corpus in fixed income securities. A debt fund usually invests in fixed income securities like corporate and government bonds, treasury bills, commercial papers, certificate of deposits and other money market instruments. Debt funds make an ideal investment choice for those individuals who aren’t happy with their existing conservative investments and are looking to switch to a scheme that offers better returns. Debt funds can also be considered by mutual fund investors to seek diversification.

What is a fund of fund?

A fund of fund is an open ended mutual fund scheme that invests in other mutual fund schemes to earn capital appreciation over the long term. A fund of fund scheme may invest in one or more than one fund to achieve a common investment objective. In a normal mutual fund scheme, investors benefit from the expertise of just one fund manager. But when you invest in a fund of fund scheme, you can benefit from the expertise of several fund managers. That’s because the fund manager of a FOF scheme invests in other mutual fund schemes and tries to rebalance the portfolio if and when required.

What are some of the primary benefits of investing in debt fund of funds?

A debt FOF scheme offers diversification like no other mutual fund scheme as investors get to benefit from the expert opinion of multiple fund managers. The performance of a FOF scheme depends on the performance on all the underlying funds that form its portfolio. A debt FOF scheme tries to replicate the performance of all the mutual funds in which it invests to achieve a common investment objective. Investors need not invest in various debt fund schemes and instead invest in a debt FOF scheme and benefit from the immense diversification that it offers. Investors do not have to pay for the expense ratio for the debt FOF scheme’s underlying funds but only for the scheme in which you have invested.

Consider staring a monthly SIP in debt FOF

If you wish to remain invested in a debt FOF for the long run, consider starting a monthly SIP. Systematic Investment Plan ensures that you save and invest a fixed amount at regular intervals. Investors can continue investing in debt fund of funds till their investment objective is accomplished. One can also make the most out of online SIP calculator, a free tool accessible to everyone. The investment portfolio of a debt FOF might not get affected by the fluctuations in the stock market but they are prone to credit risk and interest rate risk.