Should You Invest in a Fund of Funds Scheme?

Mutual fund houses offer a large number of schemes to invest your money. This makes it difficult for you to pick the right mutual fund scheme if you lack the knowledge or time. The Fund of Funds can help you to select the best mutual fund scheme. A professional fund manager does comprehensive research and chooses the well-performing mutual fund schemes. However, should you invest in this Fund of Funds (FoFs)?

What is the Fund of Funds scheme?

A Fund of Funds scheme does not put your money in stocks or bonds. It invests in the units of other mutual fund schemes of the same or different fund houses. For example, a mutual fund manager may put money in a gold mutual fund scheme, as compared to a direct investment in gold. 

A Fund of Funds scheme may invest your money in equity, debt, or gold as per the investment objective. FoFs which focus on the international markets would invest your money in the mutual fund schemes of foreign countries. 

Should you invest in a Fund of Funds scheme?

Picking the right mutual fund can be a time-consuming process. In a Fund of Funds scheme, the fund manager would select the best mutual fund schemes. It depends on the performance over some time and various other factors. 

The fund manager would track the mutual fund portfolio to achieve the investment objective of maximising your return over the long run. The mutual fund may outperform the benchmark as the fund manager replaces the low performers with well-performing schemes. You can achieve your financial goals without the hassles of choosing and tracking multiple mutual fund schemes. 

Also Read: When Should You Exit a Mutual Fund Scheme?

A Fund of Funds that invest in foreign mutual fund schemes allows you to diversify your portfolio, beyond the domestic markets. You can invest in the stocks and bonds of US and European Companies. You get an opportunity to earn a higher return on investment. 

A Fund of Funds schemes has a higher expense ratio as compared to other mutual fund schemes. You will have to bear the expense ratio of the FoF scheme and the underlying mutual fund scheme. You must invest in a Fund of Funds scheme only if you can invest for the long term. 

How are Fund of Funds schemes taxed?

Taxation on the capital gains of the Fund of Funds schemes is just like debt mutual funds. If you redeem the investment before three years, the short-term capital gains would be taxed as per your income tax slab. The taxation of long-term capital gains is at 20% with the benefit of indexation. However, a Fund of Funds scheme may invest in an equity-oriented scheme which has total assets of at least 90% in equity shares of domestic companies that are listed on a stock exchange. The capital gains would be taxed just like equity-oriented funds. 

A Fund of Funds scheme offers you the opportunity to diversify your investment with a single fund. However, you must check if the investment objectives of the fund match your risk appetite and financial goals. You must pay close attention to the track record and the investment style of the Fund Manager. In a nutshell, you must invest in A Fund of Funds scheme only if you can understand the investment and invest for the long-term.

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in