Have you ever heard of the concept – Fund of Funds? If not, then let’s explore how Fund of Funds will change the way you invest in overseas markets!
Investing in foreign markets has become a new trend. But at the end of the day, we all know that it will be costly if you start picking individual stocks yourself. For example, if you wish to buy five shares of Tesla today, it will cost you a whopping Rs 1,07,915.79! (as of 2nd September 2022).
To avoid these hassles, we decide to invest in Mutual funds or ETFs. But, how will you invest in international ETFs or Mutual Funds as an investor sitting in India?
Simply through Fund of Funds! Well, this concept will change the way you invest in overseas markets.
So, let’s begin.
What is Fund of Funds (FoF)?
The concept of Fund of Funds is fairly simple.
- You, as an investor, will invest in an Indian mutual fund.
- Your Indian mutual fund will invest in an overseas mutual fund that invests in stocks, index funds, or ETFs.
So, a fund of funds is an indirect way of investing in the overseas market.
You might be thinking, what’s unique about these FoFs?
Fund of Funds can invest your money in units of ETFs, Index Funds, or Mutual Funds that invest in stocks listed overseas. They can also invest in multiple mutual funds.
Apart from this, they can also offer theme-based investment opportunities that are not accessible in the domestic markets. For example, if you wish to invest in the artificial intelligence theme that is slowly catching people’s attention abroad, then artificial intelligence theme-based FoF is your way to go!
Did You Know?
You can also get access to the entire stock market of the US through FOFs. Recently Navi Mutual Fund introduced the Navi US Total Stock Market Fund of Fund.
This mutual fund invests in the Vanguard Total Stock Market ETF (VTI). VTI tracks the performance of 4,000+ constituents across small, mid, and large-cap companies, representing nearly 100% of the US investable equity market.
So, as you see, FOFs can give you the wings to capitalise on every money-making opportunity while sitting by your desk!
Now, such money-making opportunities do not come cheap. Let’s find out how much the expense ratio these FOFs charge.
Expense Ratio of Fund of Funds
By now, we understand that an FoF invests your money in another mutual fund, ETF or an index fund. So, you will have to pay double the expense ratio, right?
But, as per SEBI’s guidelines, the expense ratio of FoFs should not exceed the maximum limit of 1%.
Taxation on Fund of Funds
Under India’s current income tax regime, even though a FOF is investing in an equity-oriented fund, it is still not regarded as an equity-oriented fund. It is treated as a non-equity investment and is taxed accordingly.
- If you hold the investment for more than three years, the profits will be considered long-term capital gains and will be taxed at 20% with indexation benefits.
- If you sell your investment before three years, your profits will be considered short-term capital gains and will be taxed based on your tax slab.
Even though Fund of Funds is a bit expensive, if you wish to capitalize on international trends, this is your way to go. Remember, even if investing overseas, keep your goals in mind, and don’t forget to diversify!
That’s it for today. We hope you found this newsletter insightful.
Don’t forget to share it with your friends keen on investing abroad.
*The mutual funds and stocks mentioned in the article are for educational purposes. This is not investment advice.