Monday, November 26, 2007

Should Fund of Funds be chosen as an investment vehicle?

Fund of Fund (FoF), as the name suggests, invests in multiple Mutual Funds (MFs) that might have underlying as equity or debt. The NAV of FoF is the weighted sum of funds in portfolio. The high rate of taxation weigh against FoF and hence one may NOT invest in it.

Positives:
Investor need not worry about which funds to invest in as the headache is taken by the FoF
FoF does not pay entry or exit load when it moves from one fund to another and hence the investor need not pay for those charges

Negatives:
FoFs are treated as debt mutual funds for taxation
Short term capital gains tax is 33.99% vs 11.33% incase of equity MFs
Long term capital gains tax is 22.66% without indexation or 11.33% with indexation vs ZERO for equity MFs
Dividends are taxed at 14.16% vs ZERO for equity MFs. Expense ratio is about 50 bps over 200 bps of underlying funds

Examples:
DSP ML World Gold Fund
Sundaram BNP Paribas Global Advantage Fund
DWS Global Thematic Offshore Fund

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