FoFs get their groove back: Tax tune-up resets growth tempo, shows data

Domestic FoFs hit a flat note after losing indexation benefits in April 2023

 

The domestic fund of funds (FoFs) sector, which had struggled after the loss of indexation benefits in April 2023, has seen a revival in investor interest following the tax adjustments announced in the 2024 Budget.

 

The broader category, which encompasses equity, debt, and commodity-focused offerings, has seen an increase in inflows over the past six months. FoFs have gathered nearly Rs 6,000 crore in the second half of 2024, a sharp rise compared to Rs 237 crore in the first half of the year.

 

FoFs pool capital to invest in a variety of mutual fund schemes rather than directly in equities, debt, or commodities. 

 

Currently, there are 88 domestic FoFs, with most being feeder funds for exchange-traded funds (ETFs), directing investments into their respective ETFs.

 

This sector, however, also offers opportunities for fund houses to offer distinct products, such as asset allocation or multi-sector strategies.

 

Experts suggest that with renewed investor enthusiasm, fund houses may begin to create more specialised products through the FoF model.

 

The slump in FoF inflows after April 2023 stemmed from a tax overhaul. In the 2023 Union Budget, the government removed long-term capital gains (LTCG) tax advantages for non-equity funds.

 

Gains from all non-equity schemes, including FoFs, were then subject to taxation at the investor’s slab rate.

 

The latest Union Budget has restored the LTCG benefit for FoFs. From 2026-27, gains from such schemes will be taxed at 12.5 per cent for investors who hold their investments for over two years.