Fund of funds!!!

A Fund of Funds (FoF) is, as the name suggests, a collection of funds. Fund of Funds are schemes that invest in other mutual fund schemes. The portfolio of these schemes comprise only of units of other mutual fund schemes and cash / money market securities/ short term deposits pending deployment. The first FOF was launched by Franklin Templeton Mutual Fund on October 17,2003.

A "fund of funds" (FOF) is an investment strategy of holding a portfolio of other investment funds rather than investing directly in shares, bonds or other securities.A fund of funds may be 'fettered', meaning that it invests only in funds managed by the same investment company, or 'unfettered', meaning that it can invest in external funds. In simple words,  fund of fund is a mutual fund which invests in other mutual funds. This method is sometimes known as "multi-management". So a FoF will hold units of several other schemes in the same manner as a scheme holding shares of different companies.

Fund of Funds can be Sector specific e.g. Real Estate FOFs, Theme specific e.g. Equity FOFs, Gold based that gold ETF's Fund,Objective specific e.g. Life Stages FOFs or Style specific e.g.Aggressive/ Cautious FOFs etc, or overseas fund funds invest across globe.

Types of fund of Funds
There are three types of fund of Funds:

1.Funds which invest in other domestic MFs example FT Life stage fund of funds, Kotak Equity Fof

2. funds which invest in domestic exchange-traded funds (ETFs) examples are Reliance Gold Saving, Kotak Gold Fund,  Quantum Gold Savings Fund

3. Funds which invest in overseas MFs.examples are Fidelity International Opp, Franklin Asian Equity, Kotak Global Emerging Mkt fund, BNP Paribas China-India Fund, ICICI Pru Indo Asia Eq-Ret, Fidelity Global Real Assets Fund, DSP BlackRock World Gold Fund - Growth

Tax treatment for fund of funds:

Gains from FoFs are taxed on a par with debt MFs even if the underlying funds are all equity funds.

• Long Term Capital Gain Tax(after 1 year) of 11.33 % without indexation or 22.66 % with indexation will be applicable
• Short Term Capital Gains (before 1 Year) applicable as per tax slab for the investor

What are benefits of investing in fund of Funds:
One could obtain combinations of the best performing funds of different fund houses. As a FoF would monitor the portfolio and make changes from time to time, investors would be saved from the botheration of tracking funds.

Disadvantages of Investing in Fund of Funds:
On the downside, expense fees on fund of funds are typically higher than those on regular funds because they include part of the expense fees charged by the underlying funds. In addition, since a fund of funds buys many different funds which themselves invest in many different stocks, it is possible for the fund of funds to own the same stock through several different funds and it can be difficult to keep track of the overall holdings.