Fund of Funds: The All-in-One Investment Basket
For many investors, building a well-diversified portfolio feels like juggling too many balls at once at a regular interval – equity funds, debt funds, gold, silver international funds, and more. Tracking each one can be time-consuming, confusing and involving the exit loads and capital gain taxes.
What if there was a single investment that could give you exposure to all these different assets, managed by experts, without the need to constantly monitor each part? That’s exactly what a Fund of Funds (FoF) offers – a simple, convenient way to diversify your investments through one fund.
What is a Fund of Funds?
A Fund of Funds is a mutual fund scheme that invests within the fund in different schemes rather than directly in shares, bonds, or other securities. Think of it as a “basket of baskets” – you invest in the FoF, and the FoF invests in a range of underlying funds, each focusing on different asset classes or markets within the fund house or in other mutual fund schemes.
Why Investors Choose FoFs
- Easy Diversification – With one investment, you can spread your money across multiple asset classes, sectors, and even countries. This reduces the risk of being overly dependent on one market or theme.
- Expert Management – The FoF’s fund manager selects and monitors the underlying funds, ensuring your portfolio stays balanced and in line with market opportunities.
- Access to Special Opportunities – FoFs often invest in funds that are not easily available to individual investors, such as global equity funds, commodity funds, or thematic strategies.
- Convenience – Instead of handling and tracking several funds yourself, you just track a single FoF investment.
- Tax liabilities may arise when transactions are carried out at the mutual fund level. Additionally, such transactions can also be subject to exit loads.
TYPES OF FUND OF FUNDS
- Asset Allocation FoFs – Invest in a mix of equity, debt, and sometimes gold or other assets, adjusting allocations based on market conditions.
- Thematic fund of funds: Invests in multiple mutual funds focused on a specific theme or sector (e.g., technology, ESG, infrastructure) to capture targeted growth opportunities.
- All Cap fund of funds: A dynamic blend of schemes investing across large, mid, and small caps, capturing opportunities from every corner of the market.
- International FoFs – Give you exposure to overseas markets by investing in foreign mutual funds.
- Gold/Silver FoFs – invest in gold or silver ETFs instead of holding the metal directly.
They let you gain exposure to gold or silver prices without needing to buy or store the physical metal.
Things to Keep in Mind
- Performance Depends on Underlying Funds – If the selected funds do not perform well, the FoF’s returns will be impacted.
- Liquidity – FoFs are generally liquid, but those investing in overseas markets may have longer redemption timelines due to time zone differences.
Taxation of Fund of Funds in India
Tax treatment depends on the type of FoF:
or Equity Fund of Funds (FoFs)
- Short-Term Capital Gains (STCG): Units held for 24 months or less are taxed as per the applicable income tax slab rate.
- Long-Term Capital Gains (LTCG): If units are held for more than 24 months → Taxed at 5%
Non-equity FoFs
- All gains, short-term or long-term, are taxed as per your income tax slab rate.
- Investments done on or after 1st April 2023 indexation benefits are no longer available.
Note: Even if an international FoF invests in overseas equity, it is not treated as an equity fund for tax purposes in India.
Should You Invest?
A Fund of Funds can be a smart choice if you want instant diversification, exposure to unique asset classes or themes or caps and professional oversight without the hassle of managing multiple investments.
However, always weigh the costs, check the underlying funds’ quality, and consider your investment goals and tax situation before investing.
In short – A FoF is like a one-stop investment shop, giving you variety, convenience, and expert management, all wrapped into a single fund.