A Quick Take on Fund of Funds (FoFs)

Fund of Funds (FoFs) is a type of mutual fund that invests in multiple funds through a single investment. In such funds, instead of investing in stocks or other asset classes directly, the fund manager invests in a portfolio of multiple mutual funds.

A few of the types of FoFs include asset allocator or multi-asset funds, international FoFs, exchange-traded funds (ETFs)-based FoFs, multi-manager FoFs and gold FoFs. 

With the recent amendments to the Finance Bill 2023, investors are required to take into account to go-in for equity FoFs that invest about 90% of their funds in ETFs which subsequently are needed to invest about 90% of funds in equity shares of domestic companies traded on the stock exchanges. After the amendment, the fund which invests in ETFs in the way mentioned earlier will continue to draw the benefits of a lower tax on long-term capital gains (LTCGs).

After the amendments to the Finance Bill 2023, the fund which invests in other mutual funds will still be treated as debt funds for taxation. Beginning from April 1, 2023, the gains will be taxed as per the income tax slab rate of the investor irrespective of the holding period. The rule would also be applicable if all the funds into which the FoF has invested are equity-oriented funds.

An investor must take into account the financial objective as well as the investment process of the FoF prior to investing in a scheme. The investment must be in accordance with the objective and risk appetite. There is also the need to evaluate any additional offer that FoF may offer. 

It is important to note that FoFs come at a higher cost. Investing in one or two FoFs with a long-term investment goal can help to create a well-diversified investment portfolio.

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