Why are fund of funds seeing a spike in investor flows?
Income plus arbitrage FoFs
Experts attribute the increase in inflows to the innovative products that are being launched in this category.
Several fund houses have launched income plus arbitrage FoFs, which invest in a combination of a debt fund and an arbitrage fund.
These FoF schemes put 65% of the portfolio in debt and the remaining 35% in arbitrage funds – the exact reverse of what pure arbitrage funds do (35% debt and 65% arbitrage). The idea behind income plus arbitrage FoF is to limit arbitrage exposure to 35% as debt investors may not be comfortable with arbitrage yields, which tend to move a lot more than debt yields.
Also read | What's changed for India's mutual fund industry in FY25. Here are the top trends
Due to the new tax rules, FoFs now have the benefit of a long-term capital gains tax rate, that is gains from FoFs held for more than 24 months will be treated as long-term capital gains and taxed at 12.5%. There is still one caveat, the FoFs' underlying should not be more than 65% in debt funds, to avail the LTCG tax rate.
'We have seen several fund houses launching income plus arbitrage fund of funds. With the tax issue now resolved, mutual funds could launch more innovative products in this space," said Rushabh Desai, founder of Rupee with Rushabh Investment Services.
Earlier, all FoFs — barring those investing over 90% in domestic equities — were considered as non-equity funds for tax purposes. This meant all gains from FoFs were to be taxed at investor's slab rate.
More innovations
Fund houses are even filing for FoFs in other segments. For example, they have filed for a multi-asset fund of funds, wherein the FoF will invest in a mix of other funds; this could be debt funds, gold ETFs, silver ETFs, equity funds, etc.
One of the fund houses has also filed for a multi-factor FoF, which will invest in other factor-based exchange traded funds (ETFs), tracking various factors such as momentum, value, quality, low volatility and growth.
Another has filed for a fund of funds that will invest only in ETFs across asset classes — right from equities, gold, debt and even G-Sec ETFs.Also read | The ONDC mutual fund pipeline has arrived. Will it take over the industry?Should you invest?New offerings within FoFs can take different forms, given the wide possibilities as these act as feeder funds. Some products can help you create a diversified portfolio, as FoFs can invest in different funds and ETFs. However, new innovations need not always be necessary for your portfolio if it is already well-diversified. So choose FoFs that can truly diversify your portfolio.
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