A year and a half after losing relevance due to a tax change, the Rs 84,000-crore domestic fund of fund (FoF) space has sprung back to life, thanks to another change in the tax structure in Budget 2024.
The broader category, which includes offerings across equity, debt, and commodities, has seen a spike in inflows in the last two months.
There are 84 domestic FoFs currently, and the majority of them are feeder funds of exchange-traded funds (ETFs). These FoFs invest solely in their respective ETFs. However, the space also allows fund houses to offer differentiated offerings.
In July, these schemes collected Rs 478 crore, followed by a Rs 1,007 crore collection in August. The inflow last month was the highest since March 2023. During the 15-month period from April 2023 to June 2024, the category saw an aggregate outflow of Rs 2,243 crore.
Experts say that with investor interest starting to come back, fund houses may once again start to create differentiated products through the FoF route.
Madhu Nair, chief executive officer at Union Asset Management Company (AMC), said the AMC is exploring products in this segment.
“Earlier, FoFs were not attractive in the hands of investors. With the alignment of FoFs’ tax structure to two years for long-term capital gains at 12.5 per cent, it may be a strong proposition for long-term investors. We are evaluating launching solution-oriented FoF schemes which may be suitable for investors with different risk profiles and time horizons,” he said.
At least one fund house — Aditya Birla Sun Life MF — has sought the regulator’s approval for a first-of-its-kind offering using the FoF structure. The asset manager has filed papers for a yield enhancer FoF, which will invest across arbitrage funds, debt funds, gold and silver ETFs, REITs and InvITs, and money market instruments.
Prior to the tax change in March 2023, most of the multi-asset funds were FoFs, which invested in schemes and ETFs across asset classes.
There are also pure equity FoFs which invest in multiple schemes.
Chintan Haria, principal investment strategy at ICICI Prudential MF, said the advantage of FoFs is that they provide investors with diversified exposure through a single product.
“The primary goal is to tap into the fund house expertise to provide diversification and access to a variety of asset classes, fund managers, and strategies within a single investment. By investing in a fund of funds, investors can spread their risk across different funds and managers, potentially improving returns while reducing volatility,” he said.
The slump in inflows into FoFs from April 2023 was a result of a change in taxation. In Budget 2023, the government had removed the long-term capital gains (LTCG) tax benefits for non-equity funds. As a result, gains from all non-equity schemes, including FoFs, started getting taxed at the investor’s slab rate. However, in the latest budget, FoFs, along with commodity and international funds, regained the LTCG advantage. Gains from such schemes from the financial year (FY) 2027 will be taxed at 12.5 per cent if the investor has stayed invested for more than two years.
First Published: Sep 17 2024 | 7:07 PM IST
