Fund of Funds for Startups (FFS)

In News

• Recently, the government said that the Fund of Funds for Startups (FFS), launched under Startup India initiative in 2016 has committed Rs 7,385 crore to 88 Alternative Investment Funds (AIFs).
  • These AIFs in turn have invested Rs 11,206 crore in 720 startups.

About Fund of Funds for Startups 

• Meaning
  • Fund of Funds is a mutual fund scheme that invests in other schemes of mutual funds.
  • The Fund of Funds invests in other mutual fund schemes.
  • It can be domestic as well as overseas. 
• Mobilizing domestic capital 
  • FFS has been playing a monumental role in mobilizing domestic capital in the Indian startup ecosystem.
    • FFS was announced with a corpus of Rs. 10,000 crore.
  • Under FFS, support is extended to SEBI registered Alternative Investment Funds (AIFs), which in turn invest in startups.
• Operationalising the Scheme
  • Small Industries Development Bank of India (SIDBI) is responsible for operationalising the Scheme.
• Budgetary support 
  • The corpus is to be built up over 14th and 15th Finance Commission Cycles (FY 2016-2020 and FY 2021-2025) through budgetary support by the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce & Industry.
• Growth
  • The amount committed under FFS has seen a notable growth over the years recording a CAGR of over 21% since the launch of the Scheme. 

Advantages of Investing in Fund of Funds

•  Tax-Friendly
  • When your fund of funds is rebalanced to maintain a said allocation between debt and equity, there will be no tax on capital gains.
• Ease of Handling
  • There is just one folio. This makes it easy to handle the reduced number of funds that require managing.
• Professional Fund Management Services
  •  Investing in a fund of funds allows you to try out investing in professionally managed funds before they can venture out on investing individually.
• The Credibility of Portfolio Managers
  • As Fund of Funds requires the backgrounds of its managers to be checked and verified, you can be assured that a credible person handles your funds.
• Opportunity for investors with limited capital
  • Fund of Funds allows investors who possess only limited wealth to partake in diversified underlying assets. These assets would otherwise be hard for such investors to access individually.   

Disadvantages of Investing in Fund of Funds

• High Expense Ratio
  • Fund of Funds incurs expenses just like any other mutual fund schemes. But unlike mutual funds, there is an extra cost involved. 
  • Apart from the general management and administrative fees, there is an added expense about the underlying funds.
• Tax implications
  • Short-term capital gain tax according to the income tax slab of the investor would be applicable if sold before 36 months. 
  • If the units are sold after 36 months, a long-term capital gain tax of 20% with indexation is levied.
• Too much diversification
  • Fund of Funds invests in many funds which further invest in several securities. 
  • This gives rise to the possibility of the Fund of Funds, ending up owning the same stocks and securities through different funds. 
  • This reduces the potential for diversification.  

Alternative Investment Fund

• It means any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.
• AIF is defined under regulation 2(1) (b) of the SEBI (Alternative Investment Funds) Regulations, 2012.

Followings are not considered as AIF

•  Mutual funds 
• Collective investment schemes 
• Employee Stock Options Trusts 
• Employee welfare trusts or gratuity trusts 
• Family benefit trust 
• Holding companies

Types of AIF

• Venture Capital Fund (VCF): Venture Capital Funds invest in high-growth start-ups that are experiencing cash constraints in the early stages of their business and require capital to develop or expand their operations.
• Infrastructure Fund (IF): The fund invests in public assets like road and rail infrastructure, airports, and communication assets, among other things.
• Angel Fund: This is a sort of Venture Capital fund in which fund managers combine money from a number of “angel” investors to invest in early-stage firms.
• Social Venture Fund: Socially responsible investment has spawned the Social Venture Fund (SVF), which invests in firms with a strong social consciousness and a desire to have a positive impact on society.
• Private Equity (PE) Fund: PE funds invest in private firms that aren’t publicly traded with stakeholders. Because the unlisted and unauthorized private enterprises are unable to raise cash with PE funds for help.

Way forward

• High investments
  • Investments into eligible startups are approximately 3.7 times of FFS disbursements which are well above the minimum stipulated 2 times under the Scheme.
• Most of them have achieved unicorn status 
  • Performing startups supported through FFS are showing valuation increase by more than 10 times with a number of them even achieving unicorn status (valuation of over USD 1 billion).
    • Dunzo, CureFit, FreshToHome, Jumbotail, Unacademy, Uniphore, Vogo, Zostel,Zetwerk etc., are some of the notable startups funded through FFS.
• Generation of employment and wealth
  • The returns generated from the success of these startups and innovation created will remain within the country and facilitate generation of employment and creation of wealth. 

Source: PIB