What is a Fund of Funds? A Simple Guide for NRI Investors

A Fund of Funds (FoF) is an investment vehicle that invests in other investment funds rather than directly in stocks, bonds, or other securities. These underlying funds may include mutual funds, exchange-traded funds (ETFs), or other professionally managed schemes.

An FoF pools money from multiple investors and allocates it across a diversified portfolio of funds, which are managed by professional fund managers. This structure provides an additional layer of diversification and professional oversight.

Investing in a Fund of Funds offers several advantages:

• Broader diversification across multiple asset classes and fund categories

• Reduced risk through exposure to multiple underlying funds

• Access to professionally managed and potentially high-performing funds

• Simplified portfolio management through a single investment vehicle

FoFs are particularly suitable for NRIs and investors seeking a hands-off, diversified investment approach.

Yes, NRIs must consider certain regulatory and banking requirements before investing in India. These include:

• Opening an NRI bank account (NRE, NRO, or FCNR)

• Complying with guidelines issued by the Reserve Bank of India (RBI)

• Adhering to the provisions of the Foreign Exchange Management Act, 1999 (FEMA)

• Completing the mandatory KYC (Know Your Customer) process

Additionally, NRIs should ensure that the investment complies with the tax and regulatory requirements of their country of residence.

The taxation of FoFs for NRIs depends on the nature of the underlying fund and the holding period.

• Short-term capital gains (STCG): Taxed as per the applicable income tax slab rates.

• Long-term capital gains (LTCG): Generally taxed at 20% with indexation benefits, plus applicable surcharge and cess (subject to prevailing tax laws).

Tax Deducted at Source (TDS) is applicable on capital gains for NRI investors. The rate of TDS depends on whether the gains are short-term or long-term and the type of fund.

Tax provisions are governed by the Income Tax Act, 1961, and rates may change based on amendments.

When selecting a Fund of Funds, NRIs should evaluate:

• Their financial goals and risk appetite

• The fund’s expense ratio

• The expertise and track record of the fund manager

• The reputation and credibility of the fund house

• Past performance and consistency

• Fund size and liquidity

NRIs should also verify that the fund is regulated by the Securities and Exchange Board of India (SEBI).

Finally, choosing between an NRE and NRO account is important, depending on repatriation requirements and income source considerations.