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How Fund of Funds Invest

Would investing in a Fund of Funds be the right approach, considering that there is no Fund of Funds investing in funds of other asset management companies?

Would investing in a Fund of Funds be the right approach, considering that there is no Fund of Funds investing in funds of other asset management companies?
Parth Patel

A Fund of Funds (FoF) offers two distinct advantages over investing in the underlying schemes yourself. These are tax benefits and convenience. As an FoF is a mutual fund scheme, it does not have to pay any tax on the income generated from buying and selling securities.

Specifically in the context of a Fund of Funds, there will not be any tax implication when the fund rebalances its portfolio (say switches from an equity fund to a debt fund) to maintain asset allocation. If you as an investor rebalance your portfolio, you are liable to pay capital gains tax.

Rebalancing within a period of one year from investing invites short-term capital gains tax, which can be as high as 30 per cent. Long-term capital gains tax is at 10 per cent. The second benefit is in terms of convenience. You do not have to take the decision of selling units and execute the transactions.

For these benefits, funds can charge an additional expense of 0.75 per cent and this will take the maximum total expense of an FoF to 3.25 per cent. At the moment FoFs are not charging this fee but there is nothing to stop them from doing so in the future.

If you'd like to set up a portfolio consisting of schemes from a single fund house, then a FoF scheme makes a lot of sense. As FoFs investing in funds from different AMCs do not exist, there is nothing you can do. Incidentally there is nothing in the regulations forbidding an FoF from investing in funds belonging to different AMCs. The issue is rather simple: AMCs would not like to raise money for their competitors.

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