Question asked by investors:
1.Should we invest in ETFs and FoFs?
2.Are gold ETFs a good option to diversify?
3.Should we add International FoFs in our portfolio?
There are many Exchange Traded Funds (ETFs) and Fund of Funds (FoF)s in the market and they are attracting the attention of media these days. Though these products have their uses, many of them do not fit into the portfolio of retail mutual fund investors. These products might be in the spotlight for various reasons, but investors need to understand that they need not invest in them.
For example, gold is doing very well because of global uncertainties. You might see many gold ETFs topping the return charts. Gold as a diversifier is a great asset to have in the portfolio, but do you need an ETF? Investors should know that because of their low cost structure, ETFs might give better returns than gold funds. However, gold ETFs are highly illiquid. Liquidity is very important for a retail investor. That is why ETFs in general do not fit the bill.
Fund of Funds are schemes that invest in mutual fund schemes. Although they are not a bad choice, investors should weigh the pros and cons before investing. It depends on a portfolio to portfolio basis. FoFs generally have a higher expense ratio than general mutual fund schemes. Also, due to extra diversification, the returns might come down. The case is similar for international FoFs. International funds are equity funds and can be volatile. Don’t go by their high returns and invest in them. If you have the risk appetite, you might choose either a FoF or an international mutual fund scheme.
However, you should remember that FoFs, even if they invest in equities, are treated as debt mutual fund schemes for taxation. In other words, they are taxed like debt mutual funds. Investments in them will qualify for long-term capital gains (LTCGs) tax only after three years. Also, LTCGs are taxed at 20% with indexation benefit.
Don’t go to a platform and invest just because gold is offering high returns or ETFs are a low cost product or there are a lot of FoFs in the market. All these are good products, you should invest in them only if they suit your risk appetite, portfolio construct, and investment horizon.