What Is a Fund Of Funds (FOF)?

A fund of funds (FOF)—also known as a multi-manager investment—is a pooled investment fund that invests in other types of funds. In other words, its portfolio contains different underlying portfolios of other funds. These holdings replace any investing directly in bonds, stocks, and other types of securities.

FOFs usually invest in other mutual funds or hedge funds. They are typically classified as "fettered," or only able to invest in funds managed by the FOF's managing company, or "unfettered," or able to invest in funds across the market.

What are the advantages of investing in an FoF?

The biggest advantage is, it gives the investor an opportunity to invest in different schemes managed by different fund managers. While most MF houses invest in their own schemes through an FoF, there are some that also invest in other fund houses’ schemes thereby offering more diversity. For instance, the FoF scheme of Quantum Mutual Fund invests in schemes managed by Kotak MF, ICICI Prudential MF and Aditya Birla Sun Life MF.

How are gains from FoF investments taxed?

Incidentally, in its pre-Budget memorandum, AMFI suggested that the definition of ‘equity oriented funds’ be revised to include FoF investments as well, which would lead to such investments getting the same tax benefits that an equity or an equity-oriented scheme enjoys.

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