How are different fund of funds taxed?
A Fund of Funds (FoFs) is a mutual fund that invests in other mutual funds or ETFs instead of directly in stocks, bonds, or other securities. They come in various types, such as equity-oriented, debt-oriented, hybrid, international, thematic or sectoral, ETF-based, and commodity fund of funds, each catering to different investor needs and offering diversification.
Commodity FoFs, for instance, focus on investing in commodities like gold or silver, providing exposure without the need to purchase them physically. International FoFs allow investors to gain global exposure.
Understanding the taxation of FoFs is crucial as it impacts investment returns. Tax rules vary based on whether your FoF is equity-oriented or not, impacting both short-term and long-term capital gains. This knowledge helps investors take smarter decisions and optimize their tax liabilities.
In India, mutual funds are categorized as equity-oriented or ‘other than equity-oriented’. For a fund to be equity-oriented, it must have at least 65% of its assets in stocks or equity-related instruments. ‘Other than equity-oriented funds’, they do not follow these criteria.
Fund of Funds (FoFs) have even stricter criteria. To be classified as equity-oriented, a FoF must invest at least 90% of its assets in Exchange Traded Funds (ETFs) that, in turn, invest at least 90% in shares of Indian companies listed on stock exchanges. If a FoF doesn't meet these criteria, it is considered 'other than equity-oriented', even if it puts all its money into another equity fund.
This classification is important because it affects how the gains from these funds are taxed. Understanding these rules can help you choose a tax-efficient strategy. “As per the definition, for an FoF to be
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