Fund of funds: Why an FoF can be an appropriate way to invest in gold, silver?

Kolkata: Fund of funds are a type of mutual fund scheme that invests in other mutual fund schemes. Hence the name. Fund of Funds (FoF) don't invest in equities or debt securities but puts their money in a portfolio of other mutual funds. This means the portfolio of a FoF scheme consists of units of other mutual fund schemes. FoFs are actively managed investments and has a fund manager devoting his time and energy to chart out the best mutual fund schemes to invest in.

While investing, the manager of an FoF factors in the financial goals and risk tolerance levels of the investors of the FoF he/she manages with the target of reaching an optimal mix of schemes to maximise alpha and minimising risk for the investors. The investors usually can use FoFs to diversify their portfolio. These are appropriate for small investors who do not have a high risk appetite. The element of diversification in the basket offers the lower degree of risk.

The obvious question: what is a gold fund of funds? A gold FoF refers to a mutual fund scheme which will invest in different forms of gold its investments. This can actually take quite an interesting variety -- mutual funds which invest in physical gold and even funds that invest in stocks of gold mining companies. According to analysts a passive fund of funds (FoF) could also be appropriate for retail investors to invest in gold.

Analysts point out that FoF raises tax efficiency by avoiding frequent capital gains events. Analysts point out that FoFs were considered as ‘non-equity funds’ for tax purposes. Only those FoFs that invested more than 90% in domestic equities were subject to taxes like equity funds. The Budget in July 2024 provided a fillip to FoFs, which are now taxed at uniform 12.5% LTCG tax if the investor sells the units for more than 24 months.

Since FoFs are run by professionals, there is no approximations and guesswork as individual investors often do. FoF investors benefit from diversification that it inherent in FoFs. In fact, the same is true for investing in silver too.

Prominent asset management companies such as ICICI Prudential, Aditya Birla Sun Life MF, Nippon India MF, LIC MF, Axis MF, Tata MF, Invesco MF, HDFC MF have gold and silver FoFs. Many of them offer an annual return of more than 25%, reports show.

Gold and silver are both going through bull runs. Gold prices are rising for the past two years and more due to a combination of factors. These are global economic uncertainties unleashed by the trade tariffs by US President Donald Trump, a cut in the interest rates by US Fed, military conflicts in different parts of the world, aggressive buying of gold by different central banks of the world. While gold has a traditional appeal as a safe-haven asset, silver has almost all of that and an additional tail wind in the sense that it has got rising industrial demand from renewable energy and electric automobile sectors.