Bud­get 2019 has of­fered a mi­nor boost to such schemes, but there are draw­backs too

India Today - - SMART MONEY | FUND OF FUNDS - —Renu Ya­dav

Bud­get 2019 didn’t have much for mu­tual funds. How­ever, a change in one cat­e­gory—fund of funds (FoF) schemes—could end up ben­e­fit­ting in­vestors. FoFs are mu­tual fund schemes that in­vest in other mu­tual funds, in­clud­ing eq­uity and debt. The govern­ment has made changes to the tax­a­tion of FoF schemes that in­vest in eq­uity ex­change­traded funds (ETFs).

Schemes that in­vest a min­i­mum of 90 per cent of their as­sets in eq­uity ETFs will be treated as eq­uity mu­tual funds when cal­cu­lat­ing short-term cap­i­tal gains tax. There­fore, gains booked af­ter one year will be taxed at 15 per cent, rather than at the in­vestor’s slab rate. This fol­lows a sim­i­lar change in Bud­get 2018, which al­lowed this cat­e­gory of FoFs to be treated as eq­uity mu­tual funds when cal­cu­lat­ing longterm cap­i­tal gains tax.

How­ever, this move will ben­e­fit only a small cat­e­gory of funds. “The spe­cial sta­tus to these FoFs in­cen­tivise in­vest­ing in ETFs that have been used by the govern­ment as a ve­hi­cle to fur­ther

tar­get its dis­in­vest­ment (CPSE ETF and Bharat 22 ETF),” says Chi­rag Me­hta, se­nior fund man­ager at Al­ter­na­tive In­vest­ments. The pop­u­lar­ity of such in­vest­ments has his­tor­i­cally been tepid. “In­vest­ing in ETFs re­quires in­vestors to have a de­mat ac­count, which has affected their pop­u­lar­ity since the pro­por­tion of re­tail in­vestors who have such ac­counts is low,” he adds.


One ben­e­fit of in­vest­ing in FoF schemes is that fund man­agers de­cide which funds to in­vest in. “The big­gest ad­van­tage of such funds is that they give you ac­cess to mul­ti­ple man­agers through a sin­gle fund,” says Kaus­tubh Be­la­purkar, di­rec­tor of man­ager re­search, Morn­ingstar In­vest­ment Ad­vis­ers.

Sec­ondly, some FoFs pro­vide ac­cess to over­seas funds, which in­vest in global themes that may not be ac­ces­si­ble in In­dia. FoFs are also pass-through ve­hi­cles— there­fore, when a fund man­ager opts for re­bal­anc­ing and exit schemes, cap­i­tal gains taxes do not have to be paid. (In­di­vid­ual in­vestors do have to pay taxes when avail­ing such op­tions.)


A ma­jor draw­back has to do with tax­a­tion. Even if the scheme in­vests the ma­jor­ity of its port­fo­lio in eq­uity schemes, it is still taxed like a debt fund. Sec­ondly, in­vestors do not have con­trol over the choice of funds be­ing in­vested in. Thirdly, FoFs are also gen­er­ally more ex­pen­sive than nor­mal eq­uity schemes as they also have to bear the ex­penses of the un­der­ly­ing scheme.


FoFs make sense for re­tail in­vestors who don’t have ac­cess to the knowhow needed to take de­ci­sions re­gard­ing as­set al­lo­ca­tion. “For lay­men in­vestors, FoFs—which in­vest in both eq­uity and debt and re­bal­ance port­fo­lios based on mar­ket con­di­tions—would make sense. More so­phis­ti­cated in­vestors could also con­sider FoFs, be­cause they pro­vide ac­cess to themes which are not avail­able in In­dia, and there­fore al­low di­ver­si­fi­ca­tion,” says Anil Rego, founder and CEO of Right Horizons. Be­la­purkar says that those look­ing for one-stop so­lu­tions should con­sider such funds; how­ever, they should also con­sider their risk ap­petites and in­vest­ment ob­jec­tives be­fore­hand. How­ever, if you want full con­trol over your in­vest­ments, you should in­vest di­rectly in mu­tual fund schemes.

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