What are Fund of Funds?

What is a Fund of Funds (FoF)?
A Fund of Fund (FoF) is a mutual fund scheme that invests in other mutual fund schemes. In such a scheme the fund manager holds a portfolio of other mutual funds instead of directly investing in equity or bonds. A FoF may invest in one or more schemes of the same fund house or another fund house.

What are the type of Fof available in India?
The FoF can be domestic as well as overseas. In the case of foreign FoF, the fund manager invests in units of international mutual fund schemes. In case of a domestic FoF, there are schemes which invest in a mix of debt schemes, equity schemes, or a mix of asset class to help in asset allocation. A FoF could also be there to give investors liquidity or to enable investment without a demat account.

What are the advantages of a FoF?
The biggest advantage a fund of fund offers is that when there is a rebalancing done by the fund manager there is no tax on capital gains to an investor. Therefore, when FoF are rebalanced to maintain the desired allocation between debt and equity, you do not pay capital gains. A FoF has ease of investing as there is one NAV to track and it reduces the number of funds. Since it is managed by a professional fund manager, you are assured of credibility of the person managing your money. The product allows investors with limited wealth to own different underlying assets, which would otherwise be hard for such investors to access individually.

How are FoF taxed?
In the case of an FoF, it is classified as an equity oriented fund and equity taxation if it invests atleast 90% in Indian equity ETFs which invests at least 90% in shares of Indian companies listed on stock exchange.

However a FoF that invests in international funds or a mix of domestic equity mutual fund schemes, is taxed like any other debt mutual fund scheme. Short-term capital gain tax according to the income tax slab of the investor would be applicable if sold before 36 months. If the units are sold after 36 months, a long-term capital gain tax of 20% with indexation is levied.