A ‘Fund Of Funds’ (FOF) is an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. An FOF Scheme of a primarily invests in the units of another Mutual Fund scheme. This type of investing is often referred to as multi-manager investment
These schemes offer the investor an opportunity to diversify risk by spreading investments across multiple funds. The underlying investments for a FoF are the units of other mutual fund schemes either from the same mutual fund or other mutual fund houses.
Experts believe fund of funds are generally better suited for smaller investors that want to gain access to a range of different asset classes or for those whose advisers do not have the expertise to make single manager recommendations.
As per section 112A of the Income Tax Act, a fund of fund scheme shall be treated as an Equity Oriented Fund if:
- a minimum of ninety per cent of the total proceeds of such fund is invested in the units of such other Equity Oriented fund; and
- such other Equity Oriented fund also invests a minimum of ninety per cent of its total proceeds in the equity shares of domestic companies listed on a recognised stock exchange.
Thus, if a FoF invests in units of other Equity Oriented fund and fulfills the aforementioned criteria, then it shall be regarded as Equity Oriented Fund.
However, if the aforementioned conditions are not fulfilled, then the same shall be regarded as other than Equity Oriented Fund and subjected to the same tax treatment as applicable to a non-equity-oriented fund.
