Domestic Fund of Funds (FoF) pools investors' money to invest in a diversified portfolio of other domestic mutual funds. They offer a convenient way to achieve diversification and manage risk in a single investment, making them suitable for investors seeking a well-rounded domestic portfolio.
A Fund of Fund (FoF) is an investment strategy of holding a portfolio of other investment funds instead of investing directly in stocks, bonds or other securities. This kind of scheme mainly invests in the units of another mutual fund scheme.
In the case of FoF Domestic Funds, FoF mainly makes investments in other funds that focus on domestic markets, which in this context would typically refer to a specific country’s stock and bond markets. These funds allow investors to invest in domestic markets.
Domestic FoFs have various investment objectives, such as capital appreciation, income generation, or a combination of both, depending on the specific fund’s goals.
How FoF Domestic Fund Works?
FOF domestic funds come in many configurations as they primarily invest in line with their investment objective, which varies across schemes. Depending on the objective, the scheme may invest in equity funds, debt funds, hybrid funds or a combination of these.
Features of FoF Domestic Mutual Funds
Diversification: Domestic FOFs primarily make investments in various domestic mutual funds, which can help reduce risk.
Convenience: These funds are a one-stop shop for investors who want to invest in a variety of mutual funds.
Professional management: Domestic Fund of Funds are managed by experienced fund managers who have the expertise to select and manage a portfolio of mutual funds.
Advantages of Investing in FoF Domestic Funds
Easy Rebalancing: Rebalancing is essential when it comes to managing your investment portfolio. It could be necessary for you to sell some investments and buy others in order to rebalance your portfolio based on the performance of the underlying assets. If you sell investments in this situation, you can be obliged to pay capital gains tax.
Diversification: The main benefit of FoFs is that they allow investors to access a variety of mutual funds with various investment objectives with just one investment.
Transparency: Domestic FOFs are required to regularly declare their portfolios. Investors can now view the mutual funds in which the FOF has invested as well as the amount invested in each fund. This can assist investors in making knowledgeable choices regarding whether or not to invest in a specific FOF.
Risk Involved in FoF Domestic Funds
Market risk: These funds mainly invest in the securities of markets. The markets are volatile in nature, which leads the fund to market risk.
Manager risk: The fund manager’s expertise affects how well a FOF performs. The performance of the FOF may deteriorate if the fund manager’s strategy of investment does not work.
Factors To Consider Before Investing in FoF Domestic Funds
Investment Objective: You should make sure that your investment objective matches with the scheme’s. For instance, if you are looking to park your funds for emergencies, FoF is not an ideal fund. This is better suited for objectives like long-term wealth creation.
Risk Tolerance: Before investing in the scheme, always check the level of risk associated with the scheme and your risk tolerance as well. For instance, if you have a low risk tolerance, this may not be an ideal investment for you.
Investment Horizon: FOFs are best suited for long-term investors. Hence, it is prudent to check your investment horizon.
Who Should Invest in FoF Domestic Mutual Funds?
Domestic FOFs can be a suitable investment option for numerous investors such as:
New investors: These mutual funds are a good way for new investors to get started with mutual funds. Domestic FoFs help investors easily access a diversified portfolio of mutual funds, which can help reduce risk.
Investors with limited time: If you are an investor not looking to do independent research and select individual mutual funds, then it is a good option.
Investors who like diversification: FOFs are allowed to invest in a variety of asset classes, such as equity, debt, and gold. As a result, this can help investors to diversify their portfolios and reduce risk.
Taxability of FoF Domestic Funds
As per the new tax rules that took effect on April 1, 2023, the Fund of Funds are considered non-equity funds, irrespective of the equity holdings in the scheme. Hence, the FoF Domestic Funds gains are added to the investor’s income and taxed as per their income tax slab.
How To Invest in FoF Domestic Funds?
Investing in the FoF Domestic Funds is an easy process when you do it through your Angel One account. Just follow these simple steps:
Step 1: Log in to your account on Angel One.
Note: In case you are yet to open an account with Angel One, open a free demat account with us within a few minutes by submitting the relevant documents.
Step 2: Find a FoF Domestic Fund that suits your needs and risk profile. You can learn more about the Flexi Funds on the Angel One app. Things to do at this stage are:
Search for the fund you want to invest in based on your preference.
Analyse the fund’s past performance, tax impact, future potential, etc. You can calculate the potential returns using the mutual fund returns calculator.
Evaluate the fund’s level of risk, its ratings, lock-in period and expense ratio.
Step 3: Once you decide which FoF Domestic Fund you want to invest in, open your Angel One account, go to the Mutual Funds section, and buy the mutual fund’s units. The steps involved are:
Decide whether you want to invest via SIP or a lump sum one-time investment.
Choose a monthly SIP date. Enter the amount you want to invest and choose your preferred payment mode.
After placing the order, you can create an AutoPay to make hassle-free future instalments in case of SIP investments.
ICICI Prudential Thematic Advantage Fund (FOF) Growth
It is an Equity FoF mutual fund scheme from ICICI Prudential Mutual Fund, which was launched on November 10, 2003. The fund has an expense ratio of 0.45%.
ICICI Pru Bharat 22 FOF
It is an equity-oriented mutual fund scheme. The fund has no lock-in period and an expense ratio of 0.08%. The minimum lump sum investment required in ICICI Pru Bharat 22 FOF is ₹5,000.
Aditya Birla SL Financial Planning FOF Moderate Plan
It is an open-ended fund-of-funds scheme investing in a portfolio of mutual fund schemes predominantly in a combination of Equity Funds, Liquid/Money Market Funds and Debt Funds. The expense ratio of the fund is 0.26%.
ICICI Pru Passive Strategy Fund
The primary objective of this fund is to generate capital appreciation primarily from a portfolio that is invested in exchange-traded funds. The expense ratio of the fund is 0.13%.
Quantum Equity FoF
The Quantum Equity Fund of Funds invests in good quality, diversified equity schemes after extensive qualitative and quantitative research. The expense ratio of the fund is 0.51%.
HSBC Managed Solutions India-Growth
It is an open-ended fund of fund scheme investing in a basket of equity, debt, gold and other exchange-traded funds). The expense ratio of the fund is 1.03%.
HSBC Managed Solutions India-Moderate
The scheme’s objective is to derive long-term total return primarily by seeking capital appreciation through an active asset allocation in units of equity mutual funds as well as in a basket of debt mutual funds, gold ETFs and other ETFs. The expense ratio of the fund is 0.93%.
Bandhan Asset Alloc FoF-Aggr
The main investment objective of Bandhan Asset Alloc FoF-Aggr is to provide diversification across asset classes and generate a mix of capital appreciation and income predominantly through investment in equity funds and debt funds of IDFC Mutual Fund based on a defined asset allocation model.
Bandhan All Seasons Bond Fund
It is a FOF (Fund of Funds) structure which typically invests in debt schemes up to short-term funds. The expense ratio of the fund is 0.09%.
ICICI Pru Debt Mgmt Fund
The investment objective of ICICI Pru Debt Mgmt Fund is to generate capital appreciation mainly from a portfolio of debt-oriented schemes. The expense ratio of the fund is 0.41%.
The risk factor in domestic FoF depends on the investment goal of the FoF, the underlying mutual funds it invests in, and the investor's risk appetite.
Should I invest in FoF Domestic Mutual Funds?
You can choose FoF domestic mutual funds depending on your investment objective, risk appetite and investment horizon. However, conducting thorough research and consulting a financial advisor to determine if they align with your investment strategy is essential.
What are the expected returns of FoF Domestic funds?
The expected returns of FoF Domestic Funds can vary significantly based on market conditions and the fund's asset allocation.
What are the risks involved in investing in FoF Domestic funds?
FoF Domestic Funds come with numerous risks, including market risk, manager risk, potential economic instability, etc. In addition, the fund is exposed to other risks related to asset classes.
Are FoF Domestic funds taxable?
Yes. As per the new tax rule, April 1, 2023, the gains on FoF domestic Funds are considered short-term capital gains, irrespective of their holding period and taxed as per your income tax slab.
How much money should I invest in FoF Domestic funds?
You can decide the investment amount on the back of your financial situation, investment objectives and risk tolerance, as there is no specified amount to invest in the domestic fund of fund.
