InvestorQ : What are fund of funds or FoF?
Suresh Patil made post

What are fund of funds or FoF?

Kunal Verma answered.
4 years ago

Fund of Funds, or FoF, is a multi-manager investment strategy, wherein a fund invests in other types of funds. Just as a mutual fund invests in a number of different securities, a fund of funds scheme invests in many different mutual funds.

The aim of Fund of Fund scheme is to achieve broad diversification and appropriate asset allocation with investments in a variety of fund categories. Investing in Fund of Fund scheme gives the investor the experience of investing in professionally-managed funds before actually opting got individual fund investing.

Fund of Fund schemes allow investors with limited capital to tap into diversified portfolios with different underlying assets, which are otherwise hard for an individual investor to access.

The USP of Fund of Fund schemes is diversification. Fund of Fund schemes are designed in a manner that they achieve greater diversification than traditional mutual funds. A single investment by the investor could get him/her a diversified portfolio comprising equity, debt, money market, bonds or gold.

These funds are also aimed at helping reduce investors’ efforts in selecting the right mutual fund schemes for their portfolio. Additionally, the onus of giving the right weightage to every underlying fund lies on the fund house that offers the Fund of Fund scheme scheme.

A few Fund of Fund schemes available are:

- Quantum Equity Fund of Fund

- Kotak Gold Fund

- ING Global Real Estate Fund

- HSBC Emerging Markets Fund

- IDFC Asset Allocation Fund of Funds

- DSP BlackRock World Gold Fund

- HSBC Brazil Equity Fund

However, one of the major disadvantage of Fund of Fund schemes are that their expense fees are higher than regular funds as they include a part of the expense feeds charged by the underlying funds as well.

Thus, Fund of Fund schemes incur double expenses:

- The expense of the fund itself

- The additional expense of the underlying funds

Another disadvantage of Fund of Fund schemes is that it becomes difficult to keep track of the overall holdings as a Fund of Fund scheme buys many different funds which themselves invest in many different stocks.

Fund of Fund schemes are mostly open-ended funds. These schemes do not have any restrictions on the number of shares or units that the fund will issue. They are available at a face value of Rs. 10 per unit. Additionally, these schemes don't levy any entry load either.While premature withdrawal is allowed in Fund of Fund schemes, an exit load will be levied on the prevailing net asset value (NAV).

Tax liability: Fund of Fund schemes are treated as debt mutual funds for the purpose of taxation. Thus, the investor will have to bear a dividend distribution tax similar to a debt mutual fund.

This holds true even if the scheme invests in equity-based mutual funds.

Just like in debt funds, short-term capital gains in Fund of Funds (FoF) are taxed in line with an investor’s tax slab. Long-term capital gains are taxed at the rate of 10% (without indexation) and 20% (with indexation).