FoF is a mutual fund scheme that primarily invests in other schemes of the same mutual fund house or schemes of other mutual funds houses. Simply put it is a type of mutual fund that invests in other mutual funds.
Mutual funds invest in a variety of assets, such as equities and debt instruments. Similarly, a FoF scheme makes investments in mutual funds. Depending on the investing strategy, the fund manager may invest in a single fund or funds from different fund houses rather than making direct investments in stocks or other instruments. These schemes provide investors with the chance to diversify their risks by investing in various funds.
Types Of Fund Of Funds
Fund of Funds assists investors in meeting a variety of their investment objectives and preferences. FoF scheme typically invests in the following funds :
1. Asset Allocation Funds
Multi-asset funds or asset allocation funds, invest across different asset classes such as equities, debt, and commodities for the purpose of diversification of the portfolio.
2. International Fund Of Funds
International FoFs invest in international mutual funds. The benefit is that investors can diversify their investments in international stocks as well.
3. Gold Fund Of Funds
These FoFs invest in those funds that invest in mutual funds that primarily trade in gold securities.
4. Exchange-Traded Fund (ETF) Based Fund Of Funds
An Exchange traded fund (ETF) is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. However, a trading and demat account are necessary in order to invest in ETFs. Fund houses develop FoFs so that investors without a demat account can also invest in their ETFs without any difficulty.
Advantages Of Investing In Fund Of Funds
- Diversification: Diverse funds and assets are one of the primary advantages of investing in a FoF. Through a single investment, the Fund of Funds provides access to multiple mutual funds with diverse investment objectives.
- Fund Management Services From Professionals: A FoF is managed by professionals with years of expertise and extensive knowledge. Therefore, FoF investors have the advantage of investing in a portfolio that is managed by many fund managers and their research teams.
- Small Capital: Anybody with limited financial resources can also invest in the FoF available in order to obtain more returns. FoFs may be the best option for individuals with the least financial expertise.
- Easy Rebalancing: Rebalancing your portfolio may require that you sell certain investments and buy others. If so, you may be liable to pay capital gains tax on the sale of investments. The greatest advantage of a FoF is that when the fund management rebalances the portfolio, investors are not subject to capital gains tax. Therefore, when FoF is rebalanced to maintain the desired allocation between debt and equity, you do not pay capital gains.
- Exposure to ETFs: If an investor doesn’t have a demat account, they can still have exposure to ETFs through a FoF that invests in ETFs.
Limitations Of Investing In Fund Of Funds
1. Taxation: Under India’s present income tax regime, a FoF is classified as a non-equity fund and taxed accordingly. In other words, despite the fact that a FoF may invest in equity-oriented funds, the FoF itself is not considered an equity-oriented fund, and hence the tax benefits now available to equity funds are not available to FoFs, and FoFs are subjected to the taxation regime applicable to debt mutual funds.
However, the above rule is subject to one exception, a FoF is considered an equity mutual fund and is subjected to the taxation regime applicable to equity mutual funds if it invests at least 90% of its corpus in Indian equity ETFs and those ETFs’ further invest 90% of their corpus in equity mutual funds.
2. High Expense Ratio: In mutual funds, the expense ratio refers to the fees investors pay to use the platform services of the mutual fund house. The FoFs may have a higher expense ratio at times. A few FoFs are seen to have a higher expense ratio than regular schemes since they bear the costs of the underlying schemes in which they have invested.
Who Should Invest In Fund Of Funds
If you are at the initial level of your investment journey, the Fund of Funds category might be a suitable starting point because it consists of a collection of mutual funds that invest in a variety of assets and securities. Also, some Fund of Funds gives investors access to specific asset classes, such as international companies, in which it would be difficult to invest through regular mutual fund schemes.
Fund of Funds is apt for those investors who want to take a minimum risk and diversify their funds in different asset classes.
How To Invest In Fund Of Funds Using Kuvera
Step 1: Sign Up on Kuvera App or visit the Kuvera website
Step 2: Register on the platform by completing the KYC process.
Step 3: Visit the invest section and select the Fund Of Funds option for the complete list.
Step 4: Select and compare various Fund Of Funds mentioned there to begin your investment journey with Kuvera.