Contents
- Meaning of Fund of Funds (FoF)
- Investment and Management of Fund of Funds (FoF)
- Who should invest in Fund of Funds?
- How do FOF works?
- Most sought-after Fund of Funds in India
- Fees and Charges related to Fund of Funds
- Benefits of Fund of Funds
- Taxation
- Merit and Demerit of Investing in Fund of Funds
- Fund of Fund (FoF) Investing in ETFs
- Things to Consider as an Investor
- Conclusion
Fund of funds is Mutual fund scheme that invests in other mutual funds which are created to satisfy the diverse needs of different investor classes based on their risk profiles, return expectations and investment goals. These are suitable for small investors who do not want to take too much risk. Funds of Funds is used under the Startup India initiative, as approved by Prime Minister, Mr Narendra Modi.
Meaning of Fund of Funds (FoF)
A Fund of Fund is a mutual fund investment strategy of retaining a portfolio of other investment funds rather than investing straightaway in stocks, bonds or other securities. A FOF Scheme of an essentially invests in the parts of another Mutual Fund scheme. This type of investment is usually related to a multi-manager investment.
These schemes give the investor a chance to expand risk by expanding investments over multiple funds. The underlying investments for an FoF are the parts of other mutual fund schemes either from the same mutual fund or other mutual fund houses.
Specialists believe fund of funds is usually fit for smaller investors who want to earn access to a variety of diverse asset classes or for those whose advisers do not comprise the expertise to make individual manager references.
Under the current Income Tax regime in India, a FOF handles as a non-Equity fund and taxed accordingly. In other words, the tax benefits currently open to an equity fund are not available to a FOF. Consequently, in case of FOFs investing in equity securities of domestic companies via EOFs, there is a double tax of Dividend Distribution Tax (DDT), when the domestic companies distribute dividends to their shareholders and again when the FOF gives the dividends to its unit-holders.
Structure of Funds of Funds-WealthBucket
Investment and Management of Fund of Funds (FoF)
Fund of Funds are actively regulated funds. Actively regulated funds are those in which the investment specialist reallocates underlying funds on a regular basis, so as to get a profitable outcome from market fluctuations. Fund of Funds is not passively operated since passively controlled funds are based on a precise allocation model and this is balanced from time to time. This scheme usually promotes investment in related mutual funds which are regulated by the same specialist. Some investments can be made in funds managed by unaffiliated advisors as well. However, the expense included in making an investment in unaffiliated mutual funds is greater than that incurred while investing in a fund from a related specialist. This is because separate costs will be applicable to the investment management research and the investor will end up paying more to several advisors.
Who should invest in Fund of Funds?
- Fund of Funds is a good chance for small investors who do not want to take too much risk.
- The diversification of funds assists with decreasing the risks to a particular extent.
- This is also a great means of investment for an investor with small amounts of funds open for investment every month.
- Even the investors who have an investment horizon of 5 years or more can consider investing in this fund. They will get the advantage of professional fund management.
How do FOF works?
- Funds of Fund provides the tax-friendly rebalancing of your portfolio and the ones allowed in India refer to the same fund house. The plan is to spend in a portfolio that consists of underlying assets rather than straight investing in stocks and bonds and different securities.
- It gives the advantage of low cost and diversification. In this, a manager chooses to invest the funds in a mutual fund portfolio, each run by other mutual fund managers.
Most sought-after Fund of Funds in India
There are various types of fund of funds available in India, the four most sought-after FoFs involves:
- Asset Allocation Funds
They are mutual funds that invest in a different class of assets. These assets vary from equity-oriented, debt-oriented or also other asset classes like gold, different metals, and properties.
- Gold Funds
These funds invest in different kinds of gold, be it in the form of material gold or the form of stocks of gold mining firms.
- International Fund of Funds
International funds are investments in mutual funds including bonds and stocks of foreign companies.
- Multi-manager Fund of Funds
It is the one that contains various professionally managed funds but is an individual portfolio.
When thinking to invest in the Fund of Fund scheme a management fee is charged on services rendered for asset allocation. The charge is nominal when contrasted to charge on a regular fund. Most costs applicable to fund allocation and management is not revealed during the tenure of operations. It will be revealed in the fund’s prospectus or annual report simply. The fund must be judged based on the underlying fund expenses and fund-level expenses. Both these parts influence the returns on investment unfavourably.
Benefits of Fund of Funds
- By this scheme, investors can purchase a share in mutual funds that are not easily open for retail investors.
- The investment will be diversified, securing lower risk and higher returns. Because of this reason, even if an asset is non-performing, the investor will receive returns from different funds.
- Investment also creates in various hedge funds which raise the possibility to receive a greater return on investment.
Taxation
FoFs are taxed like debt mutual funds. Even FoFs investing in Indian equity mutual funds are taxed like debt funds. Still, you just have to pay tax when you redeem your funds of funds. You do not have to pay any tax when the FoF trade units of an underlying mutual fund or ETF.
Merit and Demerit of Investing in Fund of Funds
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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 account and trading accounts to invest and trade 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.
Fund of Fund (FoF) Investing in ETFs-WealthBucket
Things to Consider as an Investor
- Allocation of Funds is, when you preparing for your long term purpose, you will require to build a risk tolerance, transactional timelines, tax implications, etc. The FoF’s is that will assist in all of these.
- There is a taxation difference concerning FOF’s. For example, in case your FoF is a fund of equity fund, for tax plans, it w recognises as non- equity. In that case, the short term will be 3 years and STGC will be taxed at the top rate.
- FoF’s are available, but expense ratios can be huge. They are convenient as you can enter multiple goals with an individual product. Even it is convenient as there is an individual NAV to track. But, the downside of Fund of Funds is that they become costly.
- You must constantly weigh the pros and cons before beginning with any investment decision.
- You must constantly weigh the pros and cons before beginning with any investment decision.
Conclusion
In India, FoFs are usually mutual funds investing in across mutual funds or ETFs i.e. Exchange Traded Funds. The advantage of investing in a fund of funds is the added layer of professional management and extra diversification which allows a small trader to invest in various classes of assets.
Funds of Funds will be helpful for startup funding in India and will be a large contribution towards venture capital investing in the Indian startup ecosystem.
WealthBucket is ready to provide all mutual fund services at a reasonable price. We offer various services like liquid mutual funds, debt mutual funds, equity mutual funds, and income funds and many more.
It is a perfect service platform that can give you a complete guide to mutual funds and help you. Also, you can give us a call on +91 8750005655, even you can mail us on contact@wealthbucket.in.
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