What is Fund of Fund/s?

A Fund of Funds (FoF) is an investment strategy that involves investing in a portfolio of other investment funds rather than directly in individual securities, such as stocks or bonds. This approach allows investors to gain exposure to a diversified range of assets and investment strategies through a single investment vehicle.

Some key features of a Fund of Funds:

1. Diversification: By investing in multiple funds, a FoF can provide greater diversification than an individual fund, which can help reduce risk.
2. Professional Management: FoFs are typically managed by professional fund managers who conduct research and due diligence on the underlying funds, selecting those that align with the FoF's investment objectives.
3. Access to various Strategies: FoFs can invest in a variety of fund types, including International funds, mutual funds, and exchange-traded funds (ETFs), allowing investors to access different investment strategies and asset classes. While Fund of Funds in other countries also invest in Hedge Funds, Private Equity Funds, Whereas in india, Under SEBI’s Mutual Fund Regulations, a Fund-of-Funds (FoF) are not permitted to invest directly in such Alternative Investment Funds (AIFs).
4. Cost Structure: Investors in a FoF incur additional fees, as they pay management fees for both the FoF itself and the underlying funds in which it invests. This can lead to a double fee and hence higher overall expense ratio.
5. Liquidity: The liquidity of a FoF can vary depending on the underlying funds. Some funds may have lock-up periods or restrictions on redemptions, which can affect the overall liquidity of the FoF.
6. Investment Goals: FoFs can be tailored to meet specific investment goals, such as capital appreciation, income generation, or risk management.

Fund of Funds Taxation:

Please note, If you invest in Mutual Fund directly, holding period for Long Term Gains is only 12 months and tax is 12.5% on the returns.

Key Points:

• The new 12.5% LTCG rate applies only if the FoF is not classified as a 'Specified mutual fund' (i.e., does not have 65%+ in debt).
• For FoFs meeting the strict equity-oriented criteria, equity fund tax rates may apply.
• Dividends are always taxed at slab rates.

For specific cases (such as international FoFs or those with complex structures), consult a tax advisor, as classification can affect the applicable tax rate.

Summary: Overall, a Fund of Funds can be an attractive option for investors seeking diversification and professional management, but it's important to consider the associated costs and the specific investment strategy of the FoF.

Regards,

Honvest Team.