An FoF is an investment strategy of holding a portfolio of other mutual fund schemes rather than investing directly in stocks, bonds or gold. It can come in various forms with the most popular ones being asset allocator FoF that invest in a mix of equity, fixed income and commodities like gold, silver with the allocation to each asset done based on the fund house view of the market.
There are equity FoFs which invest in a mix of domestic equity fund schemes, international equity funds or domestic ETFs. In this strategy, some fund houses stick to their own fund house schemes, while others invest in schemes of different fund houses. The schemes could choose active funds or passive funds depending on the strategy chosen.
Equity FoFs and overseas FoFs held for more than 24 months will have to pay long-term capital gains tax (LTCG) at 12.5%, from earlier being taxed as per the tax slab rate, leading to higher interest amongst investors.
“A fund of funds combines various schemes, leveraging the expertise of the fund house to provide a comprehensive view across asset classes. This approach allows investors to make more informed decisions,” says Chintan Haria, principal investment strategy at ICICI Prudential Mutual Fund.
Many first-time investors who invest without professional advice could end up buying a number of schemes in their portfolio, without realising the precise allocation they make to equity, debt or gold. Financial planners believe these schemes work well for such investors who want to keep things simple, as they help in automatic asset allocation.