What is a Fund of Funds in Mutual Funds? Benefits, Risks and How it Works

Choosing the right mutual fund is not always easy. Every scheme comes with a different asset class, risk level, strategy, and fund manager, which can make diversification feel complicated for beginners.

A fund of funds simplifies this by investing in other mutual funds rather than directly in stocks, bonds, gold, or other securities. This structure is gaining global attention, with the FoF market projected to grow from USD 15.3 billion in 2024 to USD 23.1 billion by 2030.

In this blog, we will explain the meaning of a fund of funds, how a FoF works, its benefits, risks, and key differences from regular mutual funds.  

What is a Fund of Funds?

A Fund of Funds (FoF) or “super funds”  is a mutual fund that invests in a portfolio of other mutual funds, ETFs, or underlying funds instead of directly investing in stocks, bonds, gold, or other securities. 

It acts like a structure that holds multiple underlying funds, helping investors access diversification and professional fund selection through a single investment. 

How Does a Fund of Funds Work?

A fund of funds works by collecting capital from investors and investing it in other mutual fund schemes.

Here is how it usually works:

1. The investor puts money into a fund of funds just like any other mutual fund.
2. The asset management company collects money from different investors.
3. The FoF fund manager chooses other mutual funds or ETFs based on the scheme’s objective.
4. They often maintain a portfolio of 10–20 different funds to mitigate risk. 
5. The performance of the FoF depends on how the selected underlying funds perform.
6. Even though the FoF invests in multiple funds, the investor sees one Net Asset Value or NAV, for the FoF scheme.

What are the Types of Fund of Funds?

A fund of funds can be divided into the schemes it invests in. Some FoFs invest in domestic mutual funds, while others invest in ETFs, gold funds, international funds, or multiple asset classes.

Here are the common types of fund of funds:

Type of Fund of Funds	Meaning
Asset Allocation / Multi-Asset FoFs	Invest in a mix of equity, debt, gold, or other asset classes to spread risk across different investment categories.
International FoFs	Invest in overseas mutual funds or ETFs to give investors exposure to global markets through an Indian mutual fund.
ETF-based FoFs	Invest mainly in exchange-traded funds. These may track indices, sectors, commodities, or other ETF-based strategies.
Gold FoFs	Invest in gold ETFs or gold-related funds to gain exposure to gold without buying physical gold.
Active FoFs	The fund manager actively selects and reallocates the underlying funds to meet the scheme’s investment objective.
Passive FoFs	Invest in index funds or passive ETFs that aim to track a specific market index or benchmark.
Sector FoFs	Invest in funds focused on specific sectors such as banking, technology, healthcare, or infrastructure.
Regional FoFs	Invest in funds focused on a specific region or geography, such as Asia-Pacific, Europe, or emerging markets.
Domestic Mutual Fund FoFs	Invest in other Indian mutual fund schemes based on the FoF’s objective.
Private Equity FoFs	Invest in multiple private equity funds. These are usually meant for institutional or high-net-worth investors, not regular retail mutual fund investors.

What are the Benefits of Fund of Funds?

A fund of funds can be useful for diversification and for consolidating fund selection into a single structure.

Key benefits of FoF mutual funds include:

• Professional fund selection
  The FoF fund manager selects and reviews the underlying funds in line with the scheme objective.
• Convenience for investors
  Investors do not have to compare, buy, and track many funds separately.
• Access to different asset classes
  Depending on the FoF, investors may get exposure to gold, global markets, ETFs, equity, or debt funds.
• Useful for beginners
  FoFs can be easier to understand for investors who want a managed fund route instead of building a multi-fund portfolio themselves.

Read About: What Is the Difference Between Direct and Regular Mutual Funds?

What are the Risks of Fund of Funds?

The primary risks of Fund of Funds (FoFs) include double-layering fees, diluting high-performing assets, and tax inefficiency.

Here are the key risks of FoF mutual funds:

• Higher cost structure
  A FoF may have its own expense ratio, and the underlying funds may also charge expenses. This can increase the total cost for investors.
• Market risk
  The FoF’s returns depend on the performance of the underlying funds. If those funds perform poorly, the FoF may also give weak returns.
• Limited control
  Investors cannot directly choose which funds the FoF invests in. The selection is handled by the fund manager.
• Portfolio overlap
  Some underlying funds may hold similar stocks, sectors, or assets. This can reduce the actual diversification benefit.
• Tax impact
  Taxation depends on the FoF’s structure and where it invests. Gold, international, debt-oriented, and equity-oriented FoFs may be taxed differently.

Fund of Funds vs Mutual Funds: What is the Difference?   

A regular mutual fund usually invests directly in securities such as stocks, bonds, gold, or money market instruments. A fund of funds, on the other hand, invests in other mutual fund schemes or ETFs. 

Basis	Regular Mutual Fund	Fund of Funds
Meaning	A scheme that invests directly in stocks, bonds, gold, or other assets	A scheme that invests in other mutual funds or ETFs
Investment Selection	Fund manager selects securities	Fund manager selects underlying funds
Portfolio Exposure	Exposure depends on the securities held by the scheme	Exposure depends on the funds held inside the FoF
Diversification	Diversification happens within a scheme portfolio	Diversification happens across multiple underlying funds
Cost Structure	Usually has one expense ratio	May include FoF-level expenses and underlying fund expenses
Control for Investor	The investor chooses the mutual fund category directly	Investor relies on FoF manager to choose underlying funds
Suitable For	Investors who want direct exposure to a specific fund category	Investors who want exposure to multiple funds through one scheme

Fund of Funds vs ETF: What is the Difference? 

The main difference is the investment route. FoFs are bought like mutual funds, while ETFs are bought and sold on the stock exchange through a demat and trading account. 

Point of Difference	Fund of Funds	ETFs
Investment route	Bought like a mutual fund	Bought on the stock exchange
Demat account	Usually not required	Required
Pricing	Based on NAV	Based on the live market price
Cost	May include FoF and underlying fund costs	Usually lower, but trading charges may apply
Suitable for	Investors who prefer mutual fund-style investing	Investors who are comfortable with exchange trading

Key Considerations Before Investing in FoFs

Before investing in a Fund of Funds (FoF), check the fees, underlying funds, tax treatment, and whether the scheme aligns with your investment horizon. 

1. Total Expense Ratio:
   FoFs may incur costs such as FoF management costs and the expense ratios of the underlying funds. This can make them costlier than investing directly in a single mutual fund.
2. Tax Treatment:
   FoF taxation depends on the type of scheme and the assets it invests in. Equity-oriented mutual funds generally have updated STCG and LTCG rules after the July 2024 tax changes.
3. Fund Performance:
   Do not only check the FoF’s past returns. Also, review the performance and consistency of the underlying funds across different market phases.
4. Liquidity and Exit Load:
   Check whether the FoF has an exit load if units are redeemed before a specified period. 
5. Portfolio Overlap:
   A FoF may invest in multiple funds, but those funds may hold similar stocks, sectors, or asset classes. Too much overlap can reduce the real diversification benefit.
6. Fund Manager Expertise:
   Since the FoF manager selects the underlying funds, review the fund house, strategy, and fund management approach.

Taxation of Fund of Funds in India (2026)

For FY 2026-27, many Fund of Funds (FoFs) in India may be taxed as per the investor’s applicable income tax slab if they do not meet the required domestic equity exposure criteria. 

Here’s the key tax rules for different types of FoFs

• International FoFs: Gains are generally taxed as per the investor’s applicable income tax slab if the scheme falls under specified mutual fund treatment.
• Debt-oriented FoFs: If the scheme invests more than 65% in debt and money market instruments, or 65% or more in such funds, gains are treated under specified mutual fund rules.
• Equity-oriented FoFs: If the FoF qualifies under equity rules:

1. LTCG on qualifying equity FoFs: Gains above ₹1.25 lakh are taxed at 12.5%.
2. STCG on qualifying equity FoFs: Gains are taxed at 20%.

• TDS: It is deducted on dividends over ₹10,000 
• Dividends: They are taxed at the investor’s applicable income tax slab rate.

End Note

A fund of funds can be a simple way to access multiple mutual funds through one scheme. However, FoFs should not be chosen only for convenience. Investors should check the underlying funds, expense ratio, tax treatment, risk level, and investment horizon before investing. 

Open a demat account with Shoonya to explore ETFs, stocks, bonds, and other investment options with transparent pricing. 

Fund of Funds: FAQs

Source: https://investor.sebi.gov.in/fund_of_fund.html

Disclaimer: This content is for education and awareness purposes only and should not be considered investment advice or a recommendation. Investments in securities markets are subject to market risks. Read all the related documents carefully before investing.