Your allocation to various assets, including mutual funds, should be based on your investment objectives, risk appetite and investment horizon. However, certain developments have taken place recently, which to an extent could have an impact on your investing decision in certain categories of mutual funds. Let's take a look at these mutual fund categories in detail.
Fund of Funds (FoFs)
Fund of Funds (FoFs) are mutual funds that invest in other funds. The purpose is to get the features of other funds in one wrapper fund.
The logic to invest in FoFs is that they manage the allocation to the underlying funds, usually equity and debt, in accordance with a certain risk profile and mandate. You can do this at your end, too, by investing in pure equity funds or debt funds, or by investing directly in equity stocks and bonds.
However, when you do a portfolio adjustment yourself, there is a tax implication that has to be taken into consideration. So, when you are moving from one fund to another, it will be considered as a sale and purchase, and there will be consequent tax impact on the transaction. When you sell and purchase equity stocks or bonds, there is a tax impact, too. A mutual fund, per se, is a tax-free entity; the tax you pay is on your gains and payouts. Hence, as long as your objectives and the mandate of the fund matches, there is good reason to invest in FoFs.
Now there is a favourable change in taxation of gains from FoFs. Till July 22, 2024, in the growth option of FoFs, the gains were taxable at the marginal slab rate (MSL), which for many investors in the highest tax bracket, was 30 per cent plus surcharge and cess. After July 23, 2024, provided you hold on to the fund for a minimum of two years, it will be taxed at 12.5 per cent plus surcharge and cess.
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