What is a Fund of Funds (FoF)?
A Fund of funds (FoF) is a type of mutual fund which invests in other mutual funds or investment avenues such as hedge funds. A Fund of Fund basically represents an investment strategy which pools money and invests in other investment funds rather than investing directly in stocks or bonds or other assets.
In India, FoFs are typically mutual funds investing in overseas mutual funds or ETFs (Exchange Traded Funds). The benefit of investing in fund of funds is the extra layer of professional management and added diversification which provides an opportunity to a small trader to invest in different classes of assets.
Fund of Fund Investing Overseas
This type of Fund of Fund (FoF) invests in international funds which are registered in foreign countries. These foreign funds, in turn, hold foreign stocks. This way the FoF enables Indian investors to get exposure to foreign stocks such as Alphabet (Google), Apple, Microsoft, General Motors etc.
For example, DSP US Flexible Equity Fund invests in Blackrock Global Funds – US Flexible Equity Fund, an international fund managed by Blackrock.
Fund of Fund (FoF) Investing in ETFs
FoFs also give investors access to ETFs. An ETF (Exchange Traded Fund) invests in stocks, bonds or commodities like gold. It is not sold like an ordinary mutual fund but is rather traded continuously on the stock exchange. However, Investors need demat and trading accounts to invest and trade in ETFs.
Also Read : Top ETFs to Invest in 2019
This leaves out a large section of investors from the ETF market. As a result, mutual fund houses have created FoFs to give ordinary investors access to ETFs. For example, Reliance Gold Savings Fund is a FoF which invests in India’s largest gold ETF, Reliance ETF Gold BeES.
Major Fund of Funds (FoFs) to Invest in India
FoFs add another layer to the investing process and may come with a higher expense ratio than what you would incur by directly investing in the underlying mutual fund. However in return, you can conveniently invest in the underlying fund and you get access to stocks and markets that you may not get otherwise.
Also Read : What is Expense Ratio in Mutual Funds?
FoFs are taxed like debt mutual funds. Even FoFs investing in Indian equity mutual funds, are taxed as debt funds. However, you only have to pay tax when you redeem your FoF. You do not have to pay any tax when the FoF buys or sells units of an underlying mutual fund or ETF.
|Fund Type||Holding Period for Long Term||Short Term||Long Term|
|Equity Fund||1 year||15%||10%- Only if gains exceeding Rs. 1 lakh in a year|
|Aggressive Hybrid Equity Fund||1 year||15%||10%|
|Other Hybrid Funds||If more than 65% of assets in equity, same as equity funds. Otherwise same as debt funds.|
|Debt Fund||3 years||Slab rate||20% with indexation|
|International Funds||3 years||Slab rate||20% with indexation|
Also Read : How Mutual Funds are Taxed?