Is there a solution that can make our investment journey simple and convenient?
‘We are all ears. Pls go ahead and tell us how we can do our Asset Allocation properly,’ Sneha, who was the host of the kitty party where I was invited as a guest to speak about investments, encouraged me.
‘Let’s follow the principle of abstraction where we start with something simple first and then get into more complicated details,’ I responded.
‘What do you mean?’
‘Well, if you want to do this on your own, you will need to answer a number of questions such as when, how, and how much ?to invest in different asset classes, how to choose amongst thousands of mutual funds, ETFs, or stocks, when to make changes in the portfolio, tax implications, etc.’
Source: ABSLAMC Research
‘Let’s look at a simple solution that takes care of your asset allocation without you needing to get into any of the details of all these questions. And if at all, you are interested in getting into the weeds, then we can do a deep-dive.’
‘Sure, that makes sense. What is this solution?’
‘It’s called a Fund of Fund (FOF). As an investor, you only need to invest in this one FOF instead of investing in multiple Mutual Funds or stocks. So, it makes investing very simple for you. The money from thousands of individual investors is pooled together in an FOF which is also a type of Mutual Fund. The FOF is managed by a dedicated Portfolio Manager who invests the corpus into select Mutual Funds and ETFs.’
‘So the FOF would invest in different Equity and Debt Funds?’
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‘Exactly. The FOF Portfolio Manager decides the overall asset allocation to different asset classes like Domestic Equity, International Equity, Fixed Income, and Gold. And they also select suitable mutual funds, index funds, and ETFs in each asset class. You can think of it like putting together a cricket team or football team where you need different players with complementary strengths to play different roles in order for the team to win.’
Source: ABSLAMC Research
‘For example, in the FOF that I manage, our allocation to Domestic Equity is around 41%, International Equity is around 2%, Debt is around 47.5%, and Gold is 9.5%. And we have selected multiple equity funds, debt funds, and gold ETF in the portfolio.’
Source: ABSLAMC Research
‘OK. It sounds like the FOF will save us a lot of effort,’ Richa exclaimed.
‘Exactly. It’s like when we drive a car, we just use the steering wheel, accelerator, brake, and clutch, and keep our eyes on the road, right? We really don’t need to learn or know how the engine or transmission works or the physics of friction between the tyres and the road. If we get stuck in the technical details while driving, we are bound to crash!’
‘Yes, that’s true,’ Everyone concurred.