A Fund of Funds (FoF) is a type of mutual fund that invests in other mutual funds rather than investing directly in stocks, bonds, or other securities. In other words, it is a fund that invests in a portfolio of other mutual funds rather than individual securities.
Fund of Funds (FOF): Meaning
A fund of funds also known as a multi-manager investment is a pooled investment fund that invests in other types of funds.
- Investment Strategy: The FoF manager selects a mix of mutual funds from various asset classes (equity, debt, hybrid, etc.) based on the investment objectives of the FoF.
- Diversification: By investing in multiple mutual funds across different asset classes, FoFs offer investors a high level of diversification within a single investment vehicle.
- Professional Management: FoFs are managed by experienced fund managers who make decisions regarding asset allocation, fund selection, and rebalancing based on market conditions and investment objectives.
These mutual funds can invest in both domestic and international funds.
Fund of Funds (FOF): Taxation
The classification criteria for FoFs are slightly different. If FoF invests at least 90% of its money in equity-oriented funds, which then invests at least 90% of its funds in shares of Indian companies traded on stock exchanges, it is classified as an equity-oriented fund. However, even if a FOF invests 100% of its net assets in other equity funds, all other FoFs are taxed as debt schemes or other than equity-oriented schemes.
If FoF is classified as an equity fund, the tax on Short Term Capital Gains(STCG) is 15% on investments sold within one year of investment, and the tax on Long Term Capital Gains (LTCG) is 10% for profits exceeding Rs 1,00,000 and sold after one year of investment.
However, when a FoF is classified as a debt fund, the Capital gains will be taxed at the slab rates.
| Type of Funds Of Fund | Short-Term Capital Gains | Long-Term Capital Gains |
| Equity Fund | 15% under section 111A | 10% under section 112A |
| Other Funds | Slab rates | Slab rates, if purchased after 01 April 2023. Otherwise at 20% with an Indexation benefit |
Fund of Funds (FOF): Types
Asset Allocation Funds
Asset allocators or multi-asset funds invest in different asset classes such as equities, debt, and commodities like gold. For example, FoFs could invest in one mutual fund scheme that invests in stocks, one debt fund scheme that invests in bonds, and one gold fund scheme. It helps you to diversify your investments across different asset classes to earn better returns by minimizing the portfolio risk
Gold Funds
In gold funds, the FOF invests in funds that are primarily trading in gold securities. Depending upon the asset management company, this category of FOF can invest in mutual funds or gold trading companies directly. For example, ICICI Prudential Regular Gold Savings Fund (FOF) invests in ICICI Prudential Gold ETF.
International Fund of Funds
International FOFs are funds that invest in funds that are operating in foreign countries. These funds allow the investors to yield higher returns via the best-performing stocks and bonds of different countries.
Also, in this case, the fund manager of the FOF can use the expertise of the fund manager of the foreign fund, who would have the expertise of investing in the securities of the specific country.
Multi-Manager Fund of Funds
The most common type of FOF is a multi-manager fund of funds. These funds include various professionally managed Mutual Funds having different portfolio concentrations.
ETF Fund of Funds
ETF (Exchange Traded Funds) FOFs are funds that invest in shares in the stock market making it a higher-risk fund as they are subject to market risk. If one wants to invest directly in ETFs they require a Demat account. FOF has no such limitations.
Advantages of FOF
There are several benefits of investing in FOF:
- Diversification
- Professional Management
- Accessibility
- Better Risk Management
- Tailored Investment Strategies
Overall, fund of funds offer investors a convenient and efficient way to access diversified portfolios, professional management, and tailored investment strategies, thereby potentially enhancing investment outcomes while managing risk.
Limitations of FOF
The following are the limitations of investing in FOF:
- Expense ratios: The annual charge that fund houses charge to manage the investments can be higher.
- Possibility Of Portfolio Duplication: Since funds of funds (FoFs) invest in various mutual funds, they might have exposure to the same stock or debt security across multiple funds. This situation will lead to portfolio duplication.
- Lack Of Flexibility: One major disadvantage of FOF is that investors cannot choose the underlying asset in which the fund manager invests into. If one asset is not favourable it cannot not be altered.
FAQs
Fund of Funds i.e. FOF is an investment strategy where the investor holds a portfolio of other investment funds instead of directly investing in stocks. FOF provides the benefit of a diversified investment portfolio at a lower risk. A FOF Scheme primarily invests in the units of another Mutual Fund scheme.
Some of the FOFs available in India for investment are Kotak Asset Allocator Fund, ICICI Prudential Nifty Next 50 Index Fund, Aditya Brila FoF, etc.
Hey @Jay_Tanna,
The Finance Minister has introduced a new Section 194K in Budget 2020. Sec 194K was applicable on or after 1st April 2020.
As per Income Tax Act, Sec 194K mentions TDS on ‘Income’ from Mutual Funds leading to a confusion if TDS was required to be deducted on Capital Gains on Sale of Mutual Funds also.
CBDT issued an official clarification on 4th Feb 2020. It clarified that TDS should be deducted at 10% on Dividend Income only and not on Capital Gains from the sale of mutual funds. Thus, Sec 194K is applicable as follows:
Sec 194K - AMC paying dividend on equity mutual funds should deduct TDS at 10% if the dividend exceeds INR 5,000.
Read more here -
Team - please can you help clarify if cash investments are allowed in mutual funds through banks or other intermediaries? If yes are there any limits per financial year?
Hi @aniruddha_41, you can make cash investments of upto Rs. 50,000 by visiting a bank, AMC offices or other Mutual Fund Distributors. But please keep in mind that whatever returns you get with the mutual fund will only be paid in your bank account.
I bought mutual funds units in Sept 2019 which I sold in March 2020. What will be it’s tax treatment?
Hey Laxmi,
Capital Gain treatment on the sale of mutual funds depends upon the period of its holding.
If the period of holding is for more than 12 months then Long term Capital Gain will arise otherwise gain will be short term Capital gain.
And since your holding period is less than 12 months, it will be treated as short term capital gains and will be taxed at 15%.
I am salaried person and have Zerodha equity delivery account and invest in short term only and now i am going to fill ITR of FY 2021-22 but I am confused about one thing that what will be my capital gain.
When i checked the tax p&l statement of kite app of zerodha then there is 43,454 short term profit showing but my CA is calculating capital gain from AIS statement of income tax website actually there are two options given 1. Sale of securities and units of mutual fund 2. Purchase of securities and units of mutual fund. He is subtracting " Sale of securities and units of mutual fund - Purchase of securities and units of mutual fund = capital gain (79000).
Q1. Which amount will be capital gain: 43454 or 79000 ?
Q2. I do not invest in Mutual Fund then why mutual fund word is coming in AIS statement on IT portal.
do mutual fund deduct TDS on redemption of growth plan fund ?
@Ridhima_Sharma
@Yash_Kaviya
Hi @HIREiN,
No, the TDS is not applicable on the redemption of the growth plan fund. But applicable in case of dividends.
How to calculate LTCG arising out of monthly SIP in mutual funds (with direct plan, growth option ) on selling them? Is each months SIP capital gains has to be taken into account or total capital gains in financial year ?
And if answer is former, Is there any calculator to calculate such capital gains tax on monthly SIP.
Hi @sandeepsood100
Whenever you’ve had a sale transaction, ie, each month’s SIP capital gain/loss has to be taken into account on the FIFO method.
You can Store | Quicko Pro for any further guidance.