The Union Budget 2024 has brought a significant tax relief for investors in Fund of Funds (FoFs) especially those held for over 24 months. This change has sparked a renewed interest in FoF schemes as investors look to rebalance portfolios and seek diversification across asset classes and geographies.
At RURASH Financials, we see this as a timely opportunity for investors seeking tax-efficient, diversified, and professionally managed investment strategies.
What Is a Fund of Fund (FoF)?
A Fund of Fund (FoF) is a mutual fund that does not invest directly in equities or bonds, but instead allocates its corpus to other mutual funds or ETFs. In essence, it is a “fund that invests in funds,” offering investors an aggregated, diversified exposure through a single investment product.
Popular FoF Categories in India
Several FoF categories have gained popularity in the Indian market:
Precious Metals FoFs: These invest in gold or silver ETFs from the same fund house, offering a structured way to access commodity markets.
International FoFs: These provide exposure to global mutual funds or ETFs, enabling Indian investors to participate in the performance of overseas markets and companies.
Income-Plus Arbitrage FoFs: A growing category, these funds blend income-generating instruments with low-risk arbitrage strategies.
FoFs are increasingly viewed as a smart diversification tool, especially for those looking to build multi-asset exposure without managing multiple schemes.
Taxation on Fund of Funds: What Has Changed?
Under the new tax framework introduced in Budget 2024, equity-oriented FoFs now benefit from long-term capital gains (LTCG) tax of 12.5% (plus applicable cess and surcharge) if held for mo re than 24 months.
Here’s a quick breakdown:
| FoF Type | Holding Period > 24 Months | Holding Period < 24 Months |
|---|---|---|
| Equity-Oriented FoF | LTCG @ 12.5% | STCG @ investor’s slab rate |
| Gold/Silver FoFs | LTCG @ 12.5% | STCG @ investor’s slab rate |
| Non-Equity FoFs | Taxed at investor’s slab (LTCG/STCG) | Taxed at investor’s slab rate |
This revision makes FoFs more tax-efficient than traditional mutual funds, particularly for long-term investors.
Consider the Costs: Double Expense Ratios
While FoFs offer convenience and diversification, one potential drawback is the double-layered expense ratio:
One at the FoF level
Another at the level of the underlying mutual fund/ETF
This could impact net returns, particularly in FoFs focused on commodities or debt, where yield compression is common. At RURASH, we recommend evaluating the total cost of ownership before allocating capital to FoF strategies.
RURASH Insight: Is a Fund of Fund Right for You?
FoFs are increasingly relevant for:
Investors seeking global exposure with limited regulatory hurdles
Conservative investors aiming to diversify risk across managers or strategies
Clients looking for tax-advantaged passive exposure to gold or market-neutral strategies
However, selection matters. Not all FoFs are created equal. At RURASH Financials, we help clients:
Assess fund quality, cost, and structure
Align FoF strategies with broader wealth goals
Compare FoFs with direct equity, ETFs, and AIFs
Looking to optimize your post-tax returns through diversified instruments like FoFs?
Talk to RURASH Financials for research-backed, goal-oriented wealth strategies.2