Assess true cost: Add up expense ratio of FoF and underlying funds

Understand the risks of the underlying funds and whether their strategies match your objectives

A recent report from DSP Mutual Fund highlights the lack of transparency in how fund of funds (FoFs) disclose total expense ratios (TERs). While some disclose the expense ratio of both the wrapper and the underlying funds, others do not, making it hard for investors to gauge actual costs.  How FoFs work  An FoF invests in other mutual funds instead of directly holding stocks, bonds or other assets. “FoFs could also act as a feeder fund into another fund, such as an exchange-traded fund (ETF),” says Chirag Mehta, chief investment officer, Quantum Asset Management Company. Depending on the objective, FoFs may invest in equity, gold, international ETFs or active mutual fund schemes.  The underlying funds may belong to the same or different asset management companies (AMCs), and may be domestic or international.  Convenience and diversification  FoFs offer convenience—investors can access them without a demat account.  They also provide diversification. “FoFs allow investors to diversify across multiple asset classes and market segments through a single investment,” says Anil Ghelani, head – passive investments and products, DSP Mutual Fund.