Want to learn about Funds of Funds? A Fund of Funds (FoF), also known as multi-manager investments, is a pool of investment of funds that invests in other types of funds or schemes. Fund of Funds usually invests its assets in mutual fund schemes.
A regular mutual fund or scheme generally takes money from investors and invest it in equities, debt based on its mandate. On the other hand, the Fund of Fund or FoF takes money from the investors and invests it in other mutual fund schemes or assets. These mutual fund schemes can belong to other fund houses or within the fund house.
Franklin Dynamic Allocation FoF, ABSL Financial Planning FoF, Motilal Oswal Nasdaq 100 FoF, Kotak Asset Allocator, Quantum Equity FoF, among others, are some of the examples of India’s FoF.
What is the Idea Behind Fund of Funds?
Some of you must be wondering what the logic is behind a mutual fund investing money in some other mutual fund schemes? The logic is very clear: when there are already good mutual schemes with consistently good performance, what’s the point of directly investing in stocks or equities. Why not invest in these proven track record schemes? FoF’s also invested money in schemes that are classified as mutual funds, and only FOF’s managing companies are allowed to invest in those schemes. This is the basic idea behind the Fund of Funds.
Concept That Never Pick up the Pace
However, these concepts never took off due to two reasons:
- Firstly, in the initial stage, these schemes are used to invest only within the fund house. Meaning, these fund schemes were just another method to amass more assets under management. This mentality has changed lately; there are now some FoFs who have started investing in mutual fund schemes of other funds houses. Examples of a few are Kotak Standard Multicap Fund, and Quantum Equity FoF invests in Invesco India Growth Opportunities Fund, ICICI Bluechip Fund, L&T Midcap Fund, Mirae Asset Large Cap Fund, Franklin India Prima Fund, and Axis Bluechip Fund.
- Secondly, FoF was considered a non-equity scheme for taxation, which became a serious drawback because equity mutual funds used to enjoy the zero-term capital gain tax at that time.
This made the investors ask questions- Why they should pay tax only because of using the FoF method. However, Amfi is making representations to the ministry year after year. FoFs continued to be taxed as debt schemes. This is only because of the reason that equity schemes only qualify for LTCG (Long Term Capital Gain) taxation if 65 per cent out of their total surplus has been invested in Indian equities. This is the primary reason offshore investors do not qualify for equity taxation.
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