Fund of Funds (FOF): Meaning, Types and Taxation

Understanding Fund of Funds (FoF) A unique mutual fund strategy, FoF invests in a diversified portfolio of other mutual funds. Offers convenient access to diverse market segments through a single investment vehicle. Fund managers select a mix of mutual funds across asset classes like equity, debt, and hybrid.

Taxation of Fund of Funds (FoF) Tax classification depends on allocation criteria: Equity-oriented FoFs taxed at 15% for STCG and 10% for LTCG exceeding Rs 1,00,000. Other FoFs taxed at slab rates or 20% with indexation benefit if purchased after April 1, 2023. Types of Fund of Funds (FoF) Asset Allocation Funds: Diversified approach across equities, debt, and commodities like gold. Gold Funds: Invest in gold securities, either through gold mutual funds or trading companies.

International Fund of Funds: Exposure to foreign markets for potential higher returns. Multi-Manager Fund of Funds: Diversified pool managed by different investment professionals. ETF Fund of Funds: Access to ETF shares without needing a Demat account. Advantages of FOF Diversification, professional management, accessibility, risk management, and tailored strategies. Potentially enhances investment outcomes while managing risk effectively.

Limitations of FOF Higher expense ratios, portfolio duplication, lack of flexibility, and limited control over asset allocation. Investors cannot adjust allocation based on market changes or preferences once invested.