According to DSP Mutual Fund, within the FoF space, three types have stood out in terms of investor preference:
Income plus Arbitrage FoF: This FoF invests in a mix of arbitrage and debt funds, keeping debt exposure below 65%. Thanks to this structure, it qualifies for equity-like taxation, where long-term capital gains after two years are taxed at just 12.5% (plus surcharge and cess). That’s significantly lower than the highest tax rates applied to traditional debt funds, making it a more tax-efficient option for conservative investors.
Gold ETF FoF and Silver ETF FoF: These offer an easy way to invest in gold or silver by holding ETFs that track the prices of these precious metals. Significantly, investors don’t need a demat account to access them, making them convenient and accessible.
While FoFs offer convenience and tax advantages, it’s important to look beyond the headline expense ratio. What many investors miss is that there are two layers of cost involved–FoF Expense Ratio and Underlying Fund Expense Ratio. While FoF Expense Ratio involves the cost of the wrapper fund you invest in, Underlying Fund Expense Ratio is the cost charged by the funds in which the FoF invests.
The true cost of your investment, called the Total Expense Ratio (TER), is the sum of both FoF expense + Underlying fund expense.
For instance, in categories like gold or silver ETF FoFs, where performance closely mirrors commodity prices (not fund manager decisions), or Income Plus Arbitrage FoFs, where the goal is to deliver stable, debt-like returns, every rupee saved on cost counts, DSP states.
Unfortunately, not all fund houses follow this practice. Often, only the FoF’s own expense is shown, while the underlying costs are left out, making it harder to compare products fairly.
What should investors do?
Always check the total cost: don’t just stop at the FoF expense ratio. Find out what the underlying funds charge, too, DSP advises.
Seek clarity: If the TER isn’t disclosed clearly, ask your fund house or advisor for a full breakdown.
Avoid misleading comparisons: An FoF with a low published expense ratio might still be more expensive if its underlying funds charge more.