1. A Fund of Funds (FoF) is treated as a non-Equity fund under the current tax regime, and its capital gains are taxed accordingly, even when it may have invested in Equity funds.
2. However, the latest Budget has made an FoF that invests 95% of its assets in Equity ETFs to be treated as an Equity fund for the purpose of calculation of capital gains tax.
3. Hence, such FoFs will now get benefit of STCG being taxed at 15% and LTCG in excess of ₹1 lakh being taxed at 10%.
4. Other FoFs, however, that invest in MF units - whether equity or debt, or gold ETFs—will continue to be taxed as Debt funds.
5. Nevertheless, FoFs that are taxed as Debt funds are indirect beneficiaries with imposition of 10% tax on LTCG from Equity MFs, as Equity and Debt LTCG taxation gap has narrowed.
6. Also, if the FoF is a multi-manager scheme, with flexibility to select schemes across MF houses, it can offer a well-diversified product through such schemes, being spread across different market segments and fund management styles, reducing fund manager risk and capitalizing on market-cap cycles.
7. Sebi has also now capped TER of FoFs at 2%, automatically addressing dual costs charged by FoF and ETF/MF.
8. A DIY FoF investor must, however, match his risk and return profile with its underlying schemes meticulously.
9. This can be done by scrutinizing any switching of underlying schemes of the FoF, and also its TER trend.
10. With the aforesaid regulatory developments, FoF structure may now come handy for investors who are looking to build their own long-term investment portfolio.
2. However, the latest Budget has made an FoF that invests 95% of its assets in Equity ETFs to be treated as an Equity fund for the purpose of calculation of capital gains tax.
3. Hence, such FoFs will now get benefit of STCG being taxed at 15% and LTCG in excess of ₹1 lakh being taxed at 10%.
4. Other FoFs, however, that invest in MF units - whether equity or debt, or gold ETFs—will continue to be taxed as Debt funds.
5. Nevertheless, FoFs that are taxed as Debt funds are indirect beneficiaries with imposition of 10% tax on LTCG from Equity MFs, as Equity and Debt LTCG taxation gap has narrowed.
6. Also, if the FoF is a multi-manager scheme, with flexibility to select schemes across MF houses, it can offer a well-diversified product through such schemes, being spread across different market segments and fund management styles, reducing fund manager risk and capitalizing on market-cap cycles.
7. Sebi has also now capped TER of FoFs at 2%, automatically addressing dual costs charged by FoF and ETF/MF.
8. A DIY FoF investor must, however, match his risk and return profile with its underlying schemes meticulously.
9. This can be done by scrutinizing any switching of underlying schemes of the FoF, and also its TER trend.
10. With the aforesaid regulatory developments, FoF structure may now come handy for investors who are looking to build their own long-term investment portfolio.