What is a Fund of Funds or FoF?

fund-of-funds-or-fofA Fund of Funds (FoF) 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 Fund of Fund or FoF takes money from the investors and invests it in other mutual fund schemes. These mutual fund schemes can belong to other fund houses or withing the fund house.
Franklin Dynamic Allocation FoF, ABSL Financial Planning FoF, Motilal Oswal Nasdaq 100 FoF, Kotak Asset Allocator, Quatum Equity FoF, among others, are some of the examples of India’s FoF.
Some of you must be wondering what is the logic behind a mutual fund invests 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? This is the basic idea behind the Fund of Funds.
However, these concepts never took off due to two reasons:

  • Firstly, in the initial stage, these schemes 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 house. Examples of a few are Kotak Standard Multicap Fund, 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 as non-equity schemes 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 asking questions- Why they should pay tax only because of using the FoF method. Although 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 for offshore investors do not qualify for equity taxation.

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