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

A Fund of Funds (FoF) is a special type of investment where mutual funds invest in other mutual funds or ETFs. It allows investors to gain exposure to several assets through a single investment. Being an NRI, do you also want to invest in these funds but don't know how?

Read the blog to learn how an NRI invests in an FoF in India, including its different account types, benefits, risks, and taxation. So read on and gather all the information.

What is a Fund of Funds (FoF)?

A Fund of Funds (FoF) is a mutual fund scheme that, rather than directly investing in bonds, stocks, or other securities, invests in other mutual funds or ETFs. In India, this scheme is regulated by the Securities and Exchange Board of India (SEBI) and can invest in fund units from the same or different AMCs, depending on the mandate. It is also called multi-manager investing, in which investors gain exposure to several fund managers and strategies through a single investment.

FoFs are introduced to offer diversification and professional management by spreading investment across asset classes, strategies, or markets. Depending on the objectives of the scheme, FoFs may concentrate on equity (for growth), debt (for stability), and gold.

Additionally, at the AMC's discretion, these funds may be used to invest in both domestic and international funds. This further diversifies these funds.

Additionally, one of the key characteristics of these funds is that they are managed by highly trained professional portfolio managers. This certifies, to some extent, the accuracy of the market prediction, reducing the risk of incurring a loss.

This was all about Fund of Funds (FoF). Moving ahead, let's know whether NRIs can invest in FoF in India.

Can NRIs Invest in FoF in India?

Yes, NRIs can invest in FoF in India; for this, they need to follow the Foreign Exchange Management Act (FEMA) regulations. Considering this, to invest in a Fund of Funds, you need to have one of these bank accounts in India:

• Non-Resident External Rupee (NRE) Account
• Non-Resident Ordinary Rupee (NRO) Account
• Foreign Currency Non-Resident (FCNR) Account

It is because the mutual fund houses in India only accept investments in Indian rupees. Your selected bank account type for mutual fund investments should remain constant for that specific scheme.

Additionally, to handle your investments, you have two options. The first one is direct investment through NRE/ NRO bank accounts. Secondly, to manage your investments in India, you can also appoint a Power of Attorney (PoA). However, in both options, first you need to complete your Know Your Customer (KYC) process. For this, you need your recent passport-size colour photographs, self-attested copies of PAN, Aadhaar, passport, and overseas residence proof.

So, yes, from the above information, it is clear that NRIs can invest in Fund of Funds in India. Moving further, let's know the different types of Fund of Funds available for NRIs for investment in India.

Types of Fund of Funds for NRIs

The top Fund of Funds list in India comprises the following:

Asset Allocation Funds

These Fund of Funds maintain a balance of asset allocation. Depending on the condition of the markets, these divide your money between equity, debt, gold, or other securities. This further Allows Asset Allocation Funds through the best-performing instrument to generate high returns at a reduced risk level. It is guaranteed by the relatively stable securities available in the portfolio.

Gold Funds

Investing in mutual funds that are experts in trading gold-related products. FoF belonging to this category, depending on the concerned AMC, have a portfolio of the gold trading companies themselves or Mutual funds.

International Fund of Funds

Mutual funds working in foreign countries are targeted by the international fund of funds. It allows investors to yield higher returns potentially through the best-performing bonds and stocks of the respective foreign country.

Multi-Manager Fund of Funds

It is the most common type of fund of funds available in the market. The asset base of such a fund comprises several professionally managed Mutual funds, all of which have several different portfolio concentrations. A multi-manager fund of funds generally has several portfolio managers, each operating with a specific asset present in the mutual fund.

ETF Fund of Funds

As its name suggests, this invests in Exchange Traded Funds (ETFs). If you like a low-cost, passive strategy, these are ideal Investment Options. In this, rather than tracking a single index across several ETFs, your investment gets split, offering diversity with simplicity.

These are some of the different types of Fund of Funds, each serve different purpose. Moving ahead, let's know how FoF works for an NRI investor.

How FoF Works for NRI Investors

The Fund of Funds investments work through a pooled structure where the money of many investors combines to make a large investment portfolio. The real value of it comes from the allocation of assets smartly. It is because to control risk while trying to get the best returns, the fund managers spread investment across different sectors, strategies, and asset classes.

Additionally, these funds provide flexibility in their investment approach. Considering this, they can be either "fettered" and invest only in funds from the same investment company. Further, can be "unfettered" and invest their money into external funds managed by other companies.

So, this is how FoF works for NRI investors. Moving further, let's know the benefits of investing in FoF for NRIs.

Benefits of Investing in FoF for NRIs

There are several benefits of investing in a Fund of Funds for NRIs:

• Diversification: These investments target several best-performing mutual funds available in the market, each specialising in a specific sector or asset class. This certifies capital gains through diversification as both risks and returns are optimised due to the underlying portfolio option.
• Professionally Trained Managers: These investments are managed by highly professional people with many years of experience. Through intricate investment strategies, to ensure high yields, proper analysis, and calculated predictions of the market are made by portfolio managers.
• Low Resource Requirements: A person with limited financial resources can simply invest in FoF to gain higher profits. Additionally, while choosing a FoF for investment, you can also avail of the monthly investment schemes.

These are some of the benefits of investing in a Fund of Funds for NRIs. Moving ahead, let's know the limitations of investing in these funds for NRIs.

Limitations of Investing in FoF for NRIs

Here are the limitations of investing in FoF for NRIs in India:

• Expense Ratio: Compared to standard mutual funds, the Fund of Funds has a higher management expense. Additional expenses include choosing the right asset to invest in, which periodically keeps fluctuating. Further, this expense amounts to a substantial amount and is subtracted from the annual returns generated by AMC.
• Less Transparency: In the FoF, tracking where your money is actually invested can be difficult. It is because you are investing in a fund that puts your money in other funds. Further, this extra layer makes it difficult to see the complete picture of what is inside each underlying fund. Additionally, how they are performing or how often the mix changes.

So, these are the limitations of investing in FoF for NRIs. Moving further, now let's know about the taxation of these funds for NRIs.

Taxation of Fund of Funds for NRIs

The taxation on the Fund of Funds depends on its type and how long you keep the investment. Considering this, there are two types of capital gains, i.e., short-term capital gains held under 36 months and long-term capital gains held beyond 36 months.

Short-term capital gains are taxed at your income slab rate in India. The tax rates can go up to 30% plus surcharge and cess. Additionally, long-term capital gains are taxed at 20% plus surcharge and cess.

Apart from this, for NRI investors, special TDS guidelines are imposed by tax officials. They deduct 30% TDS on both short-term and long-term capital gains from FoF investments. Further, NRIs who do not submit their PAN face higher TDS rates. Considering this, the TDS rate becomes the highest of:

• 20% flat rate
• Rates specified in relevant provisions
• Rates presently in force

NRIs, through Double Taxation Avoidance Agreements (DTAA) that India has signed with 90+ countries, can reduce their tax burden. These agreements let you reduce or claim for taxes that you already paid in India against your tax obligations in your resident country.

However, for this, you need to have a Tax Residency Certificate (TRC) from the tax authorities of your resident country. Additionally, to claim DTAA benefits, you also need Form 10F.

Also, the tax rules keep changing; considering this, recent updates have changed some tax rates. On unlisted mutual funds, long-term capital gains tax is now 10% without indexation benefits. So, to better plan your investments, stay updated with tax regulations.

This was all about the taxation of FoF for NRIs. Moving ahead, let's know how NRIs can invest in these funds.

How NRIs Can Invest in FoF?

Here is a step-by-step guide on how NRIs can invest in a FoF in India:

Research and Choose a Fund of Funds

• Identify Your Investment Goals: Before selecting a FoF, check your investment objectives. It includes whether you want income generation, balanced investing, or capital growth.
• Research Available FoFs: Look into different FoFs provided by several fund houses. Check their past performance, the reputation of the fund house, and the funds or sectors they invest in.

Consult Financial Advisors

• Professional Guidance: If you are investing first time in funds or are confused about which FoF to choose, it is advisable to seek the help of a financial expert. They can provide you with insights tailored to your financial goals and situations.
• Developing Strategy: Additionally, a financial advisor can also help you in developing an investment strategy that matches your financial objectives and risk tolerance. It further makes your investment decision more informed.

Select the Investment Method

• Direct Investment through Fund Houses: You can directly invest in FoFs by contacting fund houses. This investment method often reduces your intermediary costs.
• Online Investment Platforms: Several platforms provide access to several FoFs. These online investment platforms facilitate easy comparison and are suitable for digital-savvy investors.

Complete the Investment Process

• Registration and KYC Compliance: Register yourself on the chosen online investment platform or with the fund house. After that, complete your KYC formalities, including submitting identity and address proof.
• Choose the FoF and Investment Amount: Once you set up your account and are KYC compliant, choose the desired FoF mutual fund and amount you want to invest.
• Transaction Execution: By following the fund house and platform process, execute the investment transaction. It also includes linking your bank account and transaction authorising.

Monitor and Manage Your Investment

• Regular Monitoring: Through the dashboard of the platform or regular statements from the fund house, you can simply track the performance of your FoF investment.
• Portfolio Adjustments: Depending on performance and your changing financial goals, consider adjusting your investment. Further, to ensure your investment matches your financial goals, periodically consult with your financial advisor.

So this is how NRIs can invest in a Fund of Funds in India.

Final Thoughts

Lastly, a Fund of Funds provides a hand-off, smart approach to diversification, ideal for NRIs and other investors who want wide exposure without the stress of managing mutual funds. So, whether you are targeting global markets, professional fund management, or thematic strategies, these funds offer access with built-in expertise.

However, like any investment, understanding the structure, prices, and risks of FoF is key to making it work as per your financial goals. Considering this, if you need any investment assistance, connect with Savetaxs. We have a team of financial experts who can help you solve all your doubts and make the right investment choice.