Fund of Funds - Meaning, Types and Benefits

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Maharshi Shah

Fund of Funds
Income Tax
Last updated on July 24th, 2021

When an individual invests in fund of funds they at once get the benefit of a diversified investment portfolio. Investing in fund of funds gives investors exposure to various asset classes that too at a lower risk. This article will help you understand various aspects related to funds of funds.

What is Fund of Funds?

A fund of funds also known as a multi-manager investment is a pooled investment fund that invests in other types of funds. In simpler terms, a fund of funds is a mutual fund that invests in various other mutual funds present in the market.

The most important feature of these types of mutual funds is that these funds are managed by highly trained professional portfolio managers who can accurately predict the market condition to minimize the chances of loss. Fund of funds are mutual funds that have different kind of portfolio depending upon the main aim of the fund manager. For example, if the aim is to earn higher returns and yields, then the target will be mutual funds that have higher NAV. Similarly, if the aim is stability, then mutual funds that are low-risk will be the target.

These fund of funds mutual funds can invest in both domestic and international funds. This gives them the benefit of diversification and helps in improving the yield of the fund.

Types of Fund of Funds

Following are the various type of fund of funds prevailing in India:

Asset Allocation Funds

Asset Allocation Funds are balanced mutual funds where the investment is done in diverse securities like equity, debt, gold, etc. Investing in a diverse asset pool helps the asset allocation funds to perform better and generate higher returns at a low-risk level.  

Gold Funds

In gold funds, the fund of funds invests in mutual funds that are primarily trading in gold securities. Depending upon the asset management company, this category of fund of funds can invest in mutual funds or gold trading companies directly.

International Fund of Funds

International fund of funds is those funds that invest in mutual 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.

Multi Manager Fund of Funds

The most common type of fund of funds is a multi-manager fund of funds. These funds include various professionally managed Mutual Funds having a different portfolio concentration. Such fund of funds has more than one manager, with each handling a specific asset of their expertise.

ETF Fund of Funds

ETF fund of funds are mutual 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 invest in ETFs they require a Demat trading account while investing in ETF fund of funds have no such limitations. Hence, investing in an ETF via a fund of funds is a more sought out option than a direct investment in this instrument.  

Advantages of Fund of Funds

There are several benefits of investing in Fund of Funds;

High Diversification

Fund of funds gives the opportunity to a higher degree of diversification as these funds invest in multiple schemes that in turn invest their corpus in various underlying assets.

Low Investment Amount

The amount of investment in a fund of funds is less as compared to other investment instruments. Hence, investors with limited finance can also benefit from multiple assets under the same roof.

Experience Fund Managers

Fund of funds mutual fund schemes is managed by highly professional personnel who perform thorough market research to yield higher returns.

Drawbacks of Fund of Funds

Following are the limitations of investing in fund of funds;

High Expense Ratio

Just like any other mutual funds, a fund of funds also incurs expenses. However, unlike funds of funds incur additional costs. Apart from the usual management and administrative expenses, they also have to incur costs of the underlying funds that they invest in.

Tax Implication

Tax will be levied on the fund of funds during the time of redemption of the principal amount. Fund of funds will attract long-term or short-term capital gains as per the holding period of the funds. It is to be noted that the dividend received on this investment is not taxable, as the burden is borne by the issuing fund house.

Difference between ETF and Fund of Funds

Category Fund of Funds ETF
NAV vs Market Value Units of FOF are bought or redeemed at NAV ETF is traded on a stock exchange at the Market price of each lot of share or fund 
Expense Ratio  High Low
Liquidity Might take few hours to days to get the money Bettter liquidity compared to FOF 
Taxation FOF are taxed same as Debt Funds ETFs are taxed as per their asset allocation

Got Questions? Ask Away!

  1. Hey @sushil_verma

    There are a wide range of deductions that you can claim. Apart from Section 80C tax deductions, you could claim deductions up to INR 25,000 (INR 50,000 for Senior Citizens) buying Mediclaim u/s 80D. You can claim a deduction of INR 50,000 on home loan interest under Section 80EE.

  2. Hey @Dia_malhotra , there are many deductions that you can avail of. Your salary package may include different allowances like House Rent Allowance (HRA), conveyance, transport allowance, medical reimbursement, etc. Additionally, some of these allowances are exempt up to a certain limit under section 10 of the Income Tax Act.

    For eg,

    • Medical allowance is exempt up to INR 15,000 on a reimbursement basis.
    • Children education allowance is exempt up to Rs. 200 per child per month up to a maximum of two children.
    • Conveyance allowance is exempt up to a maximum of Rs. 1600 per month.

    Tax on employment and entertainment allowance will also be allowed as a deduction from the salary income. Employment tax is deducted from your salary by your employer and then it is deposited to the state government.

  3. The benefit Section 80EEB can be claimed by individuals only. An individual taxpayer can claim interest on loan of an electric vehicle of up to INR 1.5 lacs u/s 80EEB. However, if the electric vehicle is used for the purpose of business, the vehicle should be reported as an asset, loan should be reported as a liability and the interest on loan can be claimed as a business expense irrespective of the amount. (We have updated the article with the changes).

    Thus, if you have a proprietorship business, you should claim interest amount as a business expense only if the vehicle is used for business purpose. However, if it is used for personal purpose, you can claim deduction of interest u/s 80EEB in your ITR since you would be reporting both personal and business income in the ITR (under your PAN).

    As per the Income Tax Act, the deduction under Section 80EEB is applicable from 1st April 2020 i.e. FY 2020-21.

  4. Hey @Sharath_thomas , we have updated the content according to the appropriate assessment year. Thanks for the feedback. :slight_smile:

  5. Hey @shindeonkar95

    In case of capital gain income (LTCG/STCG), transfer expenses are allowed as deduction, except STT.

    However, in case of business income (F&O, intraday), all expenses incurred for the business (including STT) are eligible to claim deduction in ITR.

    Hope, it helps!

  6. Hello,

    Is it possible to claim deductions under S. 80CCF for Infra bonds bought in the secondary market and held to maturity?

    There were a number of 10 year infra bonds issued in the 2010- 2013 period, which will start maturing soon. These are all listed on the exchanges (although hardly any liquidity or transactions in them). If I were to buy some of these bonds in the open markets and hold them in my demat to maturity (<3 years), is it possible to claim tax deductions (upto 20k per year) under 80CCF for buying?

    I couldn’t find anything on this. Any help is appreciated.

  7. Hello @Veejayy,

    Yes you can claim deduction under 80CCF for investment made in specified infrastructure and other tax saving bonds bought in the secondary market and held to maturity.

    Deduction under Section 80CCF can be availed only through investment in certain tax saving bonds, issued by banks or corporations after gaining permission from the government which shall be restricted upto 10,000 per year.

    These bonds are generally long term bonds, having tenure of more than 5 years with a lock in period of 5 years in most of the cases. These bonds can be sold after the lock in period!

    Also, interest earned on these bonds will be taxable.

    Hope this helps!

  8. Hi, I need to file my income tax for FY21, I am using Quicko platform for filing, I wanted to confirm if the ELSS investment amount for the FY21 is to be added in the section 80C, since I already the amount of Rs30,072 , should I add my ELSS amount to this existing amount and submit the total

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