Latest news with #FoFs
Mint
13-06-2025
- Business
- Mint
Why that fund of funds may turn out to be costlier than you think
Investors in fund-of-funds (FoF) schemes often do not get a clear picture of what they're really paying. In the absence of a standardized mechanism to report expense ratios, fund houses have their own approach to the calculation. Most FoF schemes report only the expense ratio of the 'wrapper", which is the cost of running the FoF. However, FoFs have other funds as their underlying, which in turn charge an expense ratio. The true expense ratio of an FoF is the wrapper cost plus the weighted expense of the underlying schemes they invest in. Take, for example, the SBI Gold Fund (Direct). Popular mutual fund comparison site Value Research lists its total expense ratio (TER) as 0.1%, the lowest for the gold FoF category. However, the underlying gold ETF that this fund feeds into has an expense ratio of 0.73%, pushing the actual cost to 0.83%, and making it the third most expensive option among 17 gold FoFs. On the same site, DSP MF's Gold FoF shows a TER of 0.65%, which seems to be the highest. However, it adds the cost of the underlying fund that it feeds into while calculating the ratio, making it the cheapest. The data, fetched on 30 April 2025, shows SBI Gold FoF manages ₹3,921 crores, and DSP Gold FoF ₹85 crores. 'Direct investors mostly look at expense ratios while choosing FoFs like gold and silver, as there is no active management involved, and the cost becomes a deciding factor. Lack of standardized reporting mechanism of TER in such funds can be particularly confusing for DIY (do it yourself) investors," said Alekh Yadav, director at Sanctum Wealth Management. Also Read: How are different fund of funds taxed? Grey zone The Securities and Exchange Board of India (Sebi) mandates that the scheme information documents (SID) and advertisements for FoFs must disclose the expenses of the underlying scheme apart from the wrapper cost. However, Sebi does not mandate disclosing the exact expenses of the underlying schemes in periodic factsheets and only mentions that disclosure be given that the underlying scheme expenses are applicable. According to chapter 5.8.1.3 of Sebi's master circular, FoFs need to disclose the underlying scheme's TER in the scheme information documents/key information memorandum (KIM). Experts say common investors hardly know that such documents exist, let alone read them. There is no mention of making it mandatory on the Amfi website and the factsheet, which is commonly used by retail investors. Most AMCs, including HDFC AMC and Kotak AMC, give a disclaimer but do not disclose the TER of the underlying schemes in their factsheet for gold ETF FoF. Fund houses like ICICI Pru disclose the underlying schemes' total expense in the factsheet along with the wrapper cost. 'Current regulations do not require disclosure of the expense ratio of underlying funds in the factsheets, though it is mandatory to disclose it in scheme documents like SID / KIM or KID," said Devang Chawda, senior product manager at DSP Asset Managers. 'In the spirit of full transparency, we voluntarily disclose the total expense ratio, including that of underlying funds, across all investor communications to reflect total cost borne by the investor." Even when the SID discloses the TER of the underlying schemes, it can be hard for retail investors to decode it. SID shows expenses charged by each underlying scheme, and if the FoF has multiple underlying schemes, the investor needs to tally the total expense by doing a weighted average calculation of all schemes. FoF category, like an asset allocator, can have multiple underlying schemes. According to the AMFI website, total TER (including underlying) in respect of FoF investing liquid schemes, index funds & ETFs has been capped at 1%. That of FoF investing in equity-oriented schemes has been capped at 2.25%, and FoFs investing in other schemes than those mentioned above have been capped at 2%. Queries sent to Sebi on Wednesday did not elicit any response, while SBI MF declined to comment on the matter. Also Read: Fund houses suggest these four tweaks to make mutual funds even more sahi How to fix this Currently, most mutual fund comparison platforms show only one TER—usually the wrapper cost—because that's what AMCs report. This leaves investors unaware of the scheme's true cost. Manuj Jain, co-founder of ValueMetrics, said the market regulator should standardise reporting of FoF expense ratios and, in the spirit of full transparency, it can push AMCs to mandate disclosure of the total expense ratio of FoF schemes, as that is the true expense that an investor incurs. Such a rule would also empower third-party comparison sites to fetch and display accurate, complete expense data, helping investors make better-informed decisions. Also Read: Should you diversify your portfolio by adding mutual funds focused on quality strategy?
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Business Standard
09-06-2025
- Business
- Business Standard
FoF expense structure not consistent across schemes, says DSP MF
The expense ratio of fund of funds (FoFs), a mutual fund category witnessing renewed interest following Budget 2024 tax changes, may be masking the real cost in several schemes, DSP Mutual Fund said in a report on Monday. FoF investors pay costs on two fronts — the expenses charged by the fund house for managing the FoF and the total expense ratio (TER) of the underlying schemes. "Investors often focus only on the expense ratio of the FoF wrapper (the fund that they directly invest in), without realising that there is also an additional hidden cost: the expense ratio of the underlying fund(s)," the fund house said. In the note, DSP MF said it has opted to disclose the total expenses of all its FoFs. "At DSP, in the spirit of full transparency, we disclose the Total Expense Ratio (TER) of our Fund of Funds (FoFs), which includes both the cost of the FoF itself and that of the underlying funds. We believe this comprehensive disclosure is essential for investors to make well-informed decisions that accurately reflect the true cost of their investments," it said.
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Business Standard
23-05-2025
- Business
- Business Standard
Tax change, gold rally power FoF AUM past Rs 1 trillion in April
The assets under management (AUM) of domestic fund of funds (FoFs) crossed the ₹1 trillion mark for the first time in April, as the category witnessed renewed interest following the taxation changes announced in Budget 2024. The broader category, which includes offerings across equity, debt and commodities, registered net inflows of over ₹11,300 crore during the 12-month period ending April 2025. This is in stark contrast to the net outflow of ₹2,446 crore recorded in the previous one-year period. Fund of funds invest the corpus in one or multiple mutual fund (MF) schemes. Currently, there are 96 domestic FoFs, with a majority of them operating as feeder funds for exchange-traded funds (ETFs). These FoFs invest in their respective ETFs. According to experts, the surge in AUM was aided by a rally in gold prices and the launch of over a dozen new offerings in the space. Gold has been one of the best-performing asset classes in the past year. As of 16 May, gold ETFs had delivered over 25 per cent return over the one-year period. Gold and silver FoFs account for nearly a quarter of the total FoF AUM, amounting to ₹24,085 crore. Of this, gold FoFs alone make up ₹21,416 crore. Asset allocation funds form another major segment of the FoF market. The largest scheme in this space — ICICI Prudential Asset Allocator — manages ₹25,277 crore.
Time of India
05-05-2025
- Business
- Time of India
Favourable change in taxation, regulatory push for Fund of Funds: Should you invest in FoFs now?
Favourable tax nudge Live Events Exploring new horizons Limited utility A mini-revolution is unfolding in the fund of funds (FoF) arena. Currently a space only sparsely inhabited by investors and AMCs, it may soon catch the fancy of more. FoFs invest in one or multiple mutual fund (MF) schemes rather than buying securities directly. The underlying investments for an FoF are the units of other MF schemes either from the same MF or other MF by a favourable shift in the tax regime, FoFs are being seen in a new light. Mutual funds are increasingly introducing more products in this avatar. Moreover, Sebi has introduced a fresh framework for FoFs, enabling their classification into distinct categories and opening the door to innovations. But do FoFs really offer a compelling proposition, distinct from existing plain-vanilla funds? Are any of the offerings worth exploring?For long, FoFs were treated as tax outliers in the mutual fund space. They were classified as 'non-equity funds' for tax purposes, regardless of the underlying asset class. Only FoFs investing over 90% in domestic equities were taxed on par with equity funds . Until 2023, gains on any FoF got taxed at 20% after indexation, if sold after three years. This created a disadvantage for certain FoFs compared to their plain-vanilla counterparts. For instance, FoFs investing in domestic equities and international equities were taxed as non-equity funds, even as mainstream funds investing in the same assets enjoyed favourable, lower LTCG taxation as equity the Budget 2023 removed LTCG benefits for non-equity funds, FoFs became even less attractive. Gains from all non-equity schemes, including FoFs, started getting taxed at the investor's slab rate. The July 2024 Budget breathed new life into FoFs. These now benefit from a uniform 12.5% LTCG tax if held for over 24 months, making them more tax-efficient. Under the updated Section 50AA, only funds with 65% or more in debt instruments are now classified as 'Specified mutual funds' and taxed at slab rates, regardless of holding period. FoFs, whether investing in domestic equities, bonds, commodities, international assets or a mix of assets, no longer get clubbed into this Bala, Head of Research, says, 'FoFs earlier lost out on taxation, but can now stand on an equal footing with other mutual fund offerings.' Manish Goel, Founder and MD, Equentis Wealth Advisory Services asserts, 'The Union Budget 2024 offered a new lease of life to FoFs.' This change levels the playing field, boosting the case for FoFs as a taxefficient diversification tool, adds a tax-friendly regime buoying investor interest, fund houses are exploring the FoF route for differentiated offerings. Currently, there are 94 FoFs, managing assets of `97,260 crore. Most of these are domestic feeder funds investing in a single underlying ETF. Fund houses typically launch an FoF variant for their ETFs, to enable investors to invest in these ETFs even without a demat account. Investors are assured of liquidity in FoFs, as the investments happen through mutual fund houses, not via exchanges. Among these are 53 overseas FoFs (in the form of feeder funds), managing assets totalling Rs.25,030 crore. These either invest in an overseas mutual fund or an international index. Only 39 multi-scheme FoFs—those investing in two or more schemes—are currently available. Most are asset allocator or multi-asset funds, combining exposures to equity, bonds, gold, and more. The Rs.24,412 crore ICICI Prudential Asset Allocator FoF is the largest in this category. Of these, around 18 are multimanager FoFs that also invest in schemes from other fund houses. The biggest among them is the Rs.1,272 crore Franklin India Dynamic Asset Allocation FoF. Clearly, the universe of multi-scheme FoFs has limited could change soon, aided by the tax shift and regulatory blessings. Many AMCs are bringing in innovative offerings in this space. For instance, mutual funds are actively turning to the FoF space in search of alternatives for debt funds. AMCs are now combining fixed income with arbitrage within the FoF framework. Even as gains from a traditional debt fund are taxed at the investor's slab rate, the FoF alternative will incur 12.5% tax on gains after two years. This presents sizeable tax savings for those in the higher tax brackets. Seven existing debt funds have been repackaged as income-plus-arbitrage schemes. Multiple new schemes are being launched seems keen to open up the FoF space further. The regulator dictates the categories of schemes that can be launched by a fund company. AMCs need to classify schemes into distinct buckets, lending a clear identity to each scheme, with a tightly defined investible universe of securities. Among these, mutual funds are also permitted to offer FoFs under 'other schemes' category. However, rules currently don't specify what funds can be offered under this umbrella. The target investment universe for these funds is also not defined. To enable more structured growth in this space, Sebi has introduced a classification framework for FoFs holding two or more all FoFs were taxed as nonequity funds, leaving them at a disadvantage to plain-vanilla this framework, AMCs can launch multi-scheme FoFs across six broad categories (see graphic), some of which include sub-categories. For example, within domestic equity-oriented FoFs, AMCs may offer two diversified FoFs (any mix of market caps) and multiple thematic or sectoral FoFs. In the hybrid FoF category, one fund each is permitted under aggressive hybrid, conservative hybrid, income-plus-arbitrage, dynamic asset allocation, and multi-asset allocation believe the move will bring muchneeded clarity to the FoF space. Rushabh Desai, Founder, Rupee with Rushabh Investment Services, says the scheme categorisation and capping will help streamline this universe. 'The FoF space was at risk of going haywire, with any number of schemes, with any permutation and combination getting launched.' The framework also opens up new possibilities for distinct solutions. Nirav Karkera, Head of Research, Fisdom, says, 'This is a developing space. The canvas is blank right now; innovation can happen in any corner.' Goel remarks, 'The framework allows fund houses greater design freedom—enabling hybrid combinations of domestic and global funds, active and passive styles, and multi-thematic allocations under a single product.'Investors may finally see a wider choice of true multi-manager FoFs, with a single fund investing across multiple schemes. Bala asserts, 'With multi-manager FoFs, the asset management company also becomes a portfolio adviser to the investor, managing a basket of funds rather than the investor picking and managing on his/her own.' When investing on their own, investors incur costs while rebalancing between individual schemes. With multi-scheme FoFs, there is no capital gains tax when the primary fund rebalances internally between two or more funds. Goel says, 'For investors, this means access to well-constructed, diversified portfolios with lower operational overhead. For the industry, it marks a shift from cookiecutter funds to next-generation offerings tailored to evolving investor appetites.'All FoFs must be classified into categories, and number of offerings expanding FoF universe may seem appealing, but as seen in the broader mutual fund space, more variety often leads to clutter and confusion. Joshi notes that plainvanilla funds are enough for most investor goals. 'There are enough options in traditional MFs. Investors don't need to chase every new product or category,' he are mostly investing across multiple asset FoFs also come with drawbacks. Unlike direct investing, they offer limited control over the selection of underlying schemes. Karkera remarks, 'In an FoF, you have to live with the fund choices of the asset manager, taking the good along with the bad.' Even if you prefer having fund selection taken off your hands, there is no assurance the mutual fund will do a better job of choosing funds. Desai says, 'The FoF investing in multiple funds needs to be managed really well if it is to take up the onus of portfolio construction for you.' Karkera observes, 'Complexities in fund selection are distinct from individual security selection. Most fund houses have not built enough capabilities to evaluate other asset managers' funds.'Investors must also contend with higher costs. Goel asserts, 'The dual expense structure—at both FoF and underlying fund levels—can eat into returns, especially in actively managed products.' However, some ideas may be worth exploring. For those seeking international exposure, overseas FoFs may offer differentiated solutions in a tax-friendly avatar, without navigating foreign investment complexities, says Goel. Overseas indices or themes not available in India are worthy options. HDFC Developed World Indices FoF, DSP Global Innovation FoF and ICICI Prudential Global Advantage Fund are examples. Goel also favours multiasset FoFs for moderate-risk investors seeking balanced returns. ICICI Prudential Asset Allocator FoF, HDFC Asset Allocator FoF, Kotak Multi Asset Allocator FoF and Franklin India Dynamic Asset Allocation Fund of Fund are some prominent names. Meanwhile, investors may avoid sectoral or thematic FoFs. 'Bundling multiple sectors is like a diversified fund and defeats the purpose of focused sectoral bets,' says Bala. Income-plus-arbitrage FoFs can be tax-efficient alternatives to regular debt funds, but come with a distinct risk-return few schemes operate as true multi-manager FoF.s
