Fund of Funds: domestic equity
A domestic equity Fund of Funds (FoF) is an Indian mutual fund scheme that invests in units of other domestic equity mutual fund schemes rather than holding stocks directly. The FoF structure provides a single-scheme vehicle for accessing multiple underlying equity funds, simplifying portfolio construction for investors who want multi-manager diversification without the operational complexity of holding multiple direct mutual fund folios.
For Indian retail investors, domestic equity FoFs are a less-common option (compared with international equity FoFs and gold FoFs) given that investors can typically hold multiple domestic equity schemes directly without significant operational burden.
Structure
Underlying holdings
A domestic equity FoF holds:
- Units of 5 to 15 underlying domestic equity mutual fund schemes.
- Typically across different AMCs or different categories within one AMC.
- Allocation rebalanced periodically per the FoF’s investment strategy.
Two-layer TER
Domestic equity FoFs carry a two-layer expense structure:
- Underlying scheme TER: 1.0 to 2.0% (depending on whether direct or regular plans are held).
- FoF wrapper TER: 0.3 to 1.0%.
- Combined effective TER: 1.3 to 3.0% (higher end if regular plans are held in the underlying).
This makes domestic equity FoFs less cost-efficient than direct multi-fund holdings, particularly with the rise of direct-plan distribution.
Rationale and use cases
Multi-manager diversification
A domestic equity FoF can provide:
- Exposure to multiple fund managers’ styles within a single investment.
- Diversification across cap segments (large, mid, small) via single scheme.
- Reduction in single-manager risk.
Simplified single-investment access
For investors who want broad domestic-equity exposure without managing multiple folios:
- Single SIP into the FoF achieves the underlying-fund mix.
- Single Statement of Account.
- Single tax statement.
Goal-based or hybrid products
Some domestic equity FoFs are structured as part of:
- Retirement-oriented schemes that hold multiple growth funds.
- Target-date funds.
- Lifestage-based asset allocation products.
Tax treatment
This is the critical post-2023 distinction:
Per debt mutual fund taxation post-2023 :
- Schemes with less than 35% in domestic equity: taxed as debt MF (slab rate).
- Schemes with 35 to 65% in domestic equity: hybrid treatment.
- Schemes with more than 65% in domestic equity: equity-oriented; LTCG / STCG per Section 112A / 111A.
A domestic equity FoF holding 90%+ in underlying domestic equity schemes (which themselves are equity-oriented) typically qualifies as equity-oriented for tax. However, AMCs must structure carefully to maintain this status.
Comparison with related FoFs
| FoF type | Underlying | Tax treatment |
|---|---|---|
| Domestic equity FoF | Indian equity MFs | Equity-oriented if 65%+ |
| International equity FoF | Foreign equity ETFs/MFs | Debt (post-2023) |
| FoF gold | Gold ETFs | Debt |
| FoF debt | Debt MFs | Debt |
| Multi-asset FoF | Mix | Hybrid |
Schemes (illustrative)
Domestic equity FoFs are relatively rare in India given direct-fund accessibility. Some that have existed:
- Aditya Birla Sun Life Active Equity Multi Manager FoF (historical).
- Various asset-allocation FoFs that primarily hold equity.
See also
- Mutual funds in India
- Fund of Funds (India)
- International equity FoF
- FoF gold
- FoF debt
- Multi-asset FoF
- SEBI October 2017 categorisation
- Equity mutual fund taxation in India
- Debt mutual fund taxation (post-2023)
- Section 112A
- Section 111A
- Total Expense Ratio (TER)
- SEBI
- AMFI
External references
References
- SEBI October 2017 categorisation circular.
- AMFI Best Practice Guidelines on FoF disclosure.
- Income Tax Act 1961, post-2023 amendments.