Explain the following: (b) Disadvantages of Fund of Funds scheme

The following are the disadvantages specified below: Additional Fees: The more diversified the fund is, the greater the likelihood that the investor will incur an incentive fee on one or more of the constituent managers, regardless of overall FoFs performance. Management Risks: Every fund manager has a particular style of diversification. This diversification style will be in perfect correlation with the number of managers involved. The views of a manager may be altogether different from the market. Operational Risks: Due diligence of a scheme in itself gives rise to operational risks. Continuous monitoring is required for knowing about performance of the funds, any possibility of a fraud and to know about the investment style of the funds and any desirable or undesirable changes in it. Qualitative Risks: These include risks associated with the management environment of the fund such as organizational structure, infrastructure, investment process, operational issues etc. Regulations in India: The fund of funds scheme was introduced in the Indian market by making suitable amendments in SEBI (Mutual Funds) (Amendment) Regulations, 2003.