What are Fund of Funds, benefits, taxation, types of FoFs in India: Explained

Fund of funds makes sense when there is a single theme or geography exposure required in the portfolio.

Fund-of-fund, mutual funds, means, taxation, expense ratio, Types of Fund-of-funds in the Indian market, vs etf, What is a fund of fund investment
FoF’s are taxed like debt funds with a long-term holding period of 3 years even if it is an Equity-oriented fund.

When you invest in a mutual fund scheme, it is important to make sure whether the fund that you are investing in, is a regular scheme or is it a Fund of Fund (FoF) scheme. In the former, your money is invested directly by the fund manager of the scheme ( unless it is an index fund) while in a FoF, your money is invested in an already existing mutual fund scheme. But, then why should anyone want to invest in a FoF and what are the benefits in investing in them and what are the types of such FoF that are available in the market.

Anup Bansal, Chief Investment Officer, Scripbox takes us through the types, benefits and the taxation structure of FoF.

What is fund-of-fund mutual fund

Fund of Funds is a type of mutual fund that invests in other established mutual funds instead of directly investing in stocks, securities, commodities, and bonds.

What is a fund of fund investment

Fund of funds makes sense when there is a single theme or geography exposure (e.g., exposure to China, US) required in the portfolio and the exposure may be taken to an established fund through a Fund of fund. Though Fund of fund may be new but the underlying fund generally having longer history means more definitive data in carrying out in-depth analysis and required due diligence needed to incorporate such asset class exposure.

Types of Fund-of-funds in the Indian market

FoFs can be both active and passive and are broadly classified as:

Asset Allocation Funds
Gold Funds
International Fund of Funds
Multi-manager Fund of Funds
ETF Fund of Funds

FoFs exposure in international stocks

There is no need to open a separate international stocks account to invest in a Fund of funds whose underlying is international stocks. If there is a suitable international fund offered through a Fund of fund in India then it is an easy way to achieve geographical diversification and take exposure to a well-known fund manager without having to take risk with individual international stocks. This compensates for unfamiliarity with a foreign country.

Fund-of-funds cost and taxation

The Fund of Funds will have an additional expense at the FoF level on top of the individual Fund level expense. FoF’s are taxed like debt funds with a long-term holding period of 3 years even if it is an Equity-oriented fund.

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