A Fund of funds (FoF) is a mutual fund which invests in other mutual funds. In India, FoFs are typically mutual funds investing in overseas mutual funds or ETFs (Exchange Traded Funds).
This type of fund invests in international funds which are registered in foreign countries. These foreign funds, in turn, hold foreign stocks. Thus an 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. Investors need demat and trading accounts to invest in ETFs. 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 an FoF which invests in India’s largest gold ETF, Reliance ETF Gold BeES.
Major FoFs in India
|FoF||Size||Invests in||Invests through|
|Franklin India Feeder Franklin US Equity Fund||Rs 755 crore||US stocks||Franklin US Equity Fund|
|DSP US Flexible Equity Fund||Rs 204 crore||US stocks||Blackrock Global Funds – US Flexible Equity Fund|
|Reliance Gold Savings Fund||Rs 609 crore||Gold||Reliance ETF Gold BeES|
Data as on 17/10/2018, Source: Value Research
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.
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. The tax rates on mutual funds are as follows (you can get more information on this here
|Fund Type||Holding Period for Long Term||Short Term||Long Term|
|Equity Fund||1 year||15%||10%|
|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|