Fund of funds mutual fund – Domestic Vs. International: Which fund of funds is better for investment?
Mutual funds offer different varieties and types that can be used to achieve various goals and financial objectives. A fund of funds is one such type. Keep reading to know whether or not you should invest in them and if they are suitable for your distinct goals.
What is a fund of funds mutual fund?
A fund of funds is a mutual fund scheme that invests in other mutual fund schemes and not direct equities. The fund manager of such a mutual fund invests within the same fund house or other fund houses as per the risk and financial goals of the investors.
This type of mutual fund can offer great diversification and ultimately lower risk. As a result, these funds are ideal for small investors who want to avoid risk or investors nearing their retirement who wish to lower the risk of their portfolio.
Domestic vs. international fund of funds
A fund of funds can be both domestic as well as international, depending on the funds it invests in. Here are some broad differences between the two:
|Points of difference||Domestic funds of funds||International funds of funds|
|Meaning||Domestic funds of funds invest in mutual funds comprising bonds and shares of domestic companies.||These types of funds invest in mutual fund schemes of global companies. These funds indirectly invest in bonds and shares of international companies.|
|Suitability||These are ideal for investors who want to explore Indian markets and companies.||These are ideal for investors who wish to invest in global companies and want global exposure.|
|Risk||The risk may be comparatively low.||These mutual fund schemes may come at greater risk in comparison. The currency values can often fluctuate and lead to more risk.|
|Taxation||Domestic mutual fund schemes are taxed as equity or debt securities.
· Equity-based funds are charged a 15% short-term capital gains (STCG) tax on interest earned above Rs. 1 lakh. The long-term capital gains (LTCG) tax charged is 10% on interest earned above Rs. 1 lakh.
· Debt funds, on the other hand, are charged STCG tax as per the income tax slab you fall into, as long as you redeem your money within 3 years from the date of unit allocation. The LTCG tax charged on these funds is 20% of the returns with indexation benefit if you redeem them after 3 years from the date of unit allocation.
|Since international mutual funds invest in equity and equity-related instruments of international companies and not domestic equities, they are not taxed as equity funds. Instead, they are taxed like debt funds. This implies that you pay STCG tax as per the income tax slab you fall into, as long as you redeem your money within 3 years from the date of unit allocation.
And you pay LTCG tax of 20% of the returns with indexation benefit if you redeem them after 3 years from the date of unit allocation.
To sum it up
Now that you know what these funds are, you can use the Tata Capital Moneyfy App to invest in both domestic and international mutual fund schemes via fund of funds mutual funds.