Exchange Traded Funds (ETFs) and Fund of Funds (FoF) Schemes- Features and Characteristics

A Fund of Funds (FoF) scheme invests the investible amount in different mutual fund schemes, instead of individual shares or bonds to ensure better diversification. An Exchange Traded Fund (ETF) is a mutual fund scheme units of which can be traded on stock exchanges like shares. As per the revised norms published by SEBI on categorization of mutual fund schemes, ETF and FoF fall under “Other schemes”

SEBI is the regulator of mutual funds in India. In a recent review, SEBI revised the norms and features of mutual fund schemes including debt funds, for ensuring uniformity in categorization of various schemes announced by different mutual fund houses. The revised norms were published vide its circular SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 6, 2017.The  norms make it easy for the investor to compare similar schemes of different fund houses and take judicious investment decision. 

Exchange Traded Fund(ETF) 

Exchange Traded Funds are mutual fund schemes that are listed and traded on exchanges, just like shares. ETFs is a convenient product for all kinds of investors including retail and corporate investors. ETFs normally invest in the shares that create an index and thus follow the performance of the index.  Some other exchange traded funds invest in specific sectors. The investment in ETF is cost effective and convenient and also offers easy liquidity.

An index like S&P CNX Nifty or BSE Sensex comprises of many stocks. An ETF invests in a basket of shares in which the weightage of each share is similar to that in the index. The trading value of ETF is the net asset value of the underlying shares. Since it is listed in stock exchange, the units can be bought and sold in exchanges in real time at the prevailing market rate. They cannot be bought from the AMC.  Thus, an ETF is like a stock listed on a stock exchange. 

Fund of Funds Mutual Fund Scheme (FoF) 

A Fund of Funds (FoFs) is a mutual fund scheme that invests in other mutual fund schemes to fulfill the requirements of various investors. The funds for investment are decided based on the risk profiles, return expectations and investment goals of investors in the fund. Investors contribute to one fund which in turn invests in multiple funds to take advantage of diversification. 

Reduced risk, better exposure and effective diversification are the advantages of investments in FoF. However, such investors are required to share two expenses: That of the invested fund and underlying fund schemes. Thus, cost of investment in FoF is comparatively on higher side. 

Norms issued by SEBI for “Other scheme” categorization 

The norms and definitions provided by SEBI for classification of  other schemes are provided below: