Under Schedule VI of the SEBI (Mutual Funds) Regulations, which statutory restriction is specifically imposed on Fund of Funds (FoF) schemes?

[ A ]A Fund of Funds scheme must invest at least 50% of its corpus in unlisted equity shares.

[ B ]A Fund of Funds scheme is permitted to borrow funds for up to five years for speculative trading.

[ C ]A Fund of Funds scheme cannot hold any liquid assets or bank deposits to meet redemption requests.

[ D ]A Fund of Funds scheme shall not invest in any other Fund of Funds scheme.[ CORRECT ]

Takeaway

Option D is correct: A Fund of Funds scheme shall not invest in any other Fund of Funds scheme.

Derivation

As per the Sixth Schedule of SEBI (Mutual Funds) Regulations, 2026, a Fund of Funds (FoF) scheme is strictly prohibited from investing in any other Fund of Funds scheme (cascading fund-of-funds structures are barred). Furthermore, no regular scheme of a mutual fund can invest in a Fund of Funds scheme. FoFs must invest exclusively in underlying mutual fund schemes, except for liquidity held to honour redemptions. This question tests explicit statutory investment boundaries. A frequent mistake is assuming FoFs can invest in other multi-layered FoFs.

Why the others fail

A — A Fund of Funds scheme must invest at least 50% of its corpus in unlisted equity shares.

Mutual funds and FoFs are prohibited from investing in unlisted equity shares of companies under standard mutual fund regulations.

B — A Fund of Funds scheme is permitted to borrow funds for up to five years for speculative trading.

Mutual fund schemes may only borrow funds for a maximum period of six months to meet temporary liquidity requirements.

C — A Fund of Funds scheme cannot hold any liquid assets or bank deposits to meet redemption requests.

FoF schemes are expressly permitted to maintain short-term bank deposits and liquid assets to service unitholder redemptions.