In the previous article, we learned about the difference between debt funds vs hybrid funds. In this article, we will look into the difference between ETF vs FOF
ETF (Exchange-traded funds)
An ETF (Exchange-traded fund) is a collection or portfolio of stocks. It aims to track market indices and thus imitate at least the same returns.
They are the choice of those people who wish to trade in open-ended funds. Like stocks, ETFs are also listed and traded on the stock exchanges.
Since trading happens on the stock exchanges, the value of the ETFs depends upon the demand and supply the price fluctuates during trading hours and can be less or more than the NAV (Net Asset value).
ETFs are of various types, like Bond ETFs, Industry-specific ETFs, Commodity ETFs, Currency ETFs, etc.
The taxability of ETFs is dependent upon the holding period LTCG (Long-term capital gains tax) is applicable if the holding period exceeds one year.
Gains up to Rs 1,00,000 are not taxed and for gains above Rs 1,00,000, LTCG is suitable at 10% without indexation benefits. For a holding period of fewer than 12 months, an STCG (Short term capital gains tax) of 15% is applicable.
For Gold ETFs, STCG is applicable if the ETF’s holding period is less than 36 months; and LTCG post that period. The applicable STCG is in accordance with your income-tax slab, and the LTCG is 20% with indexation benefits.
FOF (Fund of Fund)
A Fund of Fund (FOF) is a fund that invests in various mutual fund schemes from either the same or different fund houses. FOFs are personalizable to cater to the investment goals and appetite of the investors.
In other words, FOFs are open-ended mutual funds that contain different types of mutual funds. Unlike ETFs, FOFs are not tradeable on the stock exchanges.
FOFs’ trading happens once per day; hence they are less liquid than ETFs; The price of FOFs is calculated at the end of the trading day.
The different types of FOFs are international FOFs, gold funds, and asset allocation funds. For Funds of Funds, STCG is applicable if the ETF’s holding period is less than 36 months; and LTCG is suitable for a holding period exceeding 36 months.
The applicable STCG is per your income-tax slab, and the LTCG is 20% with indexation benefits.
In cost terms, ETFs are cheaper than mutual funds as they are passively managed; thus, their expense ratio is usually less than 0.5%. On the other hand, FOFs are a bit costly in that they are actively managed funds, and thus the management costs are added to the usual fee.
| Parameter | ETF | FOF |
| Structure | ETF is a basket of instruments (stocks, bonds, etc.) that tracks an index. For example – An ETF may track the Nifty 50 Index. | FOF is a collection of mutual funds. May or may not track an index. |
| Price | ETFs trade like stocks on the exchange and thus they have a price and not NAV. | Do not trade on an exchange and are available at NAV (Net Asset Value) as applicable. The NAV can be computed either daily, weekly, or as may be decided by the AMC in the prospectus of the fund. |
| Liquidity | Since it is traded like a stock, it has high liquidity. Thus, trading volume is a key indicator here. | Low liquidity than ETF. |
| Expense | The cheapest form of investment as the expense ratio is very low (generally less than 0.5%) | Costlier than ETFs and also actively managed mutual funds. |
| Taxes | The taxation for different ETFs is different which are Gold ETFs, Equity ETFs, and others. | FOFs are taxed as debt funds despite the asset class they hold i.e. equity or debt. |
Taxation
- For Equity Exchange Traded Funds – Tax implications are dependent on the number of years an investor holds the ETFs. If –
- Holding period <1 year – capital gains earned will be considered short-term capital gains (STCG) and tax will be 15%
- Holding period >1 year – capital gains earned will be considered long-term capital gains (LTCG) and tax will be 10% after a 1 lakh exemption.
- For Gold and other Traded Funds – Tax implications are dependent on the number of years an investor holds the ETFs. If –
- Holding period <3 years – capital gains earned will be considered short-term capital gains (STCG). Gains will be added to the investor’s income and will be taxed as per the slab.
- Holding period >3 years – Capital gains earned will be considered long-term capital gains (LTCG) and tax will be 20% after indexation benefits.
- FOFs – Tax implications are dependent on the number of years an investor holds the ETFs. If –
- Holding period <3 years – capital gains earned will be considered short-term capital gains (STCG). Gains will be added to the investor’s income and will be taxed as per the slab.
Holding period >3 years – capital gains earned will be considered long-term capital gains (LTCG) and tax will be 20% after indexation benefits
FAQs
Is ETF and FOF are same?
ETFs are a set of securities much like mutual funds. While FOF is a Fund of Fund (FOF) that invests in various mutual fund schemes from either the same or different fund houses.
Is investing in FOF good?
Investing in FoF can help you save tax. Investors pay no capital gains tax at the time of rebalancing by the fund manager.
Is ETF tax-free?
No, Tax implications on ETFs are dependent on the number of years an investor holds the ETFs. If –
o Holding period <1 year – capital gains earned will be considered short-term capital gains (STCG) and tax will be 15% o Holding period >1 year – capital gains earned will be considered long-term capital gains (LTCG) and tax will be 10% after 1 lakh exemption.
