Usually, investors who do not have the expertise, time or patience to research individual scrips in equity and debt markets invest in MFs. However, choosing a specifi c MF scheme can be diffi cult at times. This is where Fund of Funds (FoFs) could come in handy. In an FoF, the fund manager identifi es existing MF schemes and invests in them instead of investing in equity shares and debt securities. While an equity FoF invests in equity schemes and a debt FoF invests in debt schemes, a balanced FoF invests in both. An FoF helps you achieve greater diversifi cation through just one scheme. It spreads your risk across a greater universe—one equity scheme might spread your investment across 20-30 stocks, but if spread over fi ve equity schemes, the diversifi cation is more. Also, as
an FoF tracks the MF universe, it relieves you of the hassle of scouting for the best schemes.
Drawback. FoFs are treated on a par with debt funds as far as taxation is concerned. So, even if an FoF invests its entire corpus in equity funds, it is still taxed the way debt funds are. Shortterm capital gains tax is applicable as per your tax bracket if the investment is held for less than a year, and 20 per cent capital gains tax after indexation (10 per cent without indexation, as the case may be) is levied if it is held for a year or more.
