What is a Fund of Funds in Mutual Funds? Everything You Need to Know

Posted on Monday, June 30th, 2025 | By IndusInd Bank

Ever found yourself juggling multiple mutual funds, trying to keep track of where your money is going and how each one is doing? If yes, you’re not alone. Managing a well-diversified portfolio can feel overwhelming—especially if you’re just getting started.

That’s where a Fund of Funds (FoF) comes in. It’s a simplified way to invest across various mutual fund schemes without having to monitor each one individually. Think of it like a curated investment basket that does the heavy lifting for you.

In this blog, we’ll break down what a Fund of Funds really is, the types you can choose from, and the pros and cons to help you decide if it aligns with your financial preferences.

Here’s a simple way to look at it: Imagine walking into a food court and struggling to decide what to eat. Rather than choosing just one dish, you go for a combo meal that offers a little bit of everything. That’s what a FoF does. It gives you access to a mix of different mutual funds—be it equity, debt, hybrid, or even international funds—all through a single investment.

This type of fund is managed by professionals who select and maintain the portfolio of underlying mutual funds based on the FoF’s objective. So instead of tracking and researching several funds on your own, you can let the FoF manager take care of that.

Why it matters:

By investing in an FoF, you may gain diversification across asset classes, fund managers, and investment strategies—which can help manage risk more effectively.

How Does a Fund of Funds Work?

At its core, a Fund of Funds pools money from investors—just like any other mutual fund—and then invests that money in a mix of other mutual fund schemes.

But instead of picking individual stocks or bonds, the FoF manager selects a curated set of mutual funds that align with the fund’s overall strategy. These could be equity funds, debt funds, gold ETFs, international funds, or even other FoFs.

Let’s break it down with an example:

Suppose you invest ₹10,000 in a Fund of Funds focused on international growth. Rather than directly investing in stocks like Apple or Google, your money might be distributed across global mutual funds that already invest in these companies. So, you’re getting international exposure without requiring you to track foreign markets yourself.

What this structure offers:

• Built-in diversification: Your investment is spread across multiple mutual fund schemes.
• Professional oversight: The FoF manager monitors and rebalances the portfolio as per market dynamics.
• Convenience: You track just one fund instead of several.

One thing to note: Since FoFs invest in other funds that also charge fees, you may be paying two layers of expenses. More on that in the next sections.

Also Read: Simple Steps to Withdraw Money from Mutual Funds

Types of Fund of Funds in India

Fund of Funds come in various types, each aligned with specific goals or themes. Here are the most common categories:

1. Asset Class-Based FoFs

These invest in combinations of equity, debt, and gold mutual funds. The goal is to offer diversified exposure across asset classes.

A multi-asset FoF, for example, may invest in an equity fund, a debt fund, and a gold fund to balance risk and returns.

Some may focus heavily on one asset class (say, equity) but still spread investments across multiple equity schemes.

2. International FoFs

Looking to invest globally without opening a foreign brokerage account? International FoFs may be an option. These invest in overseas mutual funds or ETFs, giving you exposure to global markets like the US, Europe, or emerging economies.

For instance, a FoF might invest in a US-based mutual fund that tracks the Nasdaq 100, giving indirect access to global tech giants.

3. ETF-Based FoFs

ETFs are popular for their low cost and index-tracking features but buying them typically requires a Demat account. ETF-based FoFs offer a workaround.

Example: A gold FoF that invests in gold ETFs lets you tap into gold price movements digitally—without buying physical gold or opening a Demat.

4. Thematic or Sectoral FoFs

These focus on specific themes like technology, healthcare, ESG, or infrastructure. The underlying funds can be from the same or different fund houses but share a common investment focus.

Advantages of Investing in Fund of Funds (FoF)

So, why might someone consider a FoF? Here are some benefits that make it appealing:

1. Instant Diversification

With one investment, your money could be spread across different asset classes, sectors, or geographies. This reduces concentration risk and potentially cushions market volatility.

2. Expert Fund Selection

The fund manager selects and monitors the underlying funds, saving you time and effort. It’s like outsourcing fund research to a professional.

3. Global Reach Made Easy

Want exposure to international stocks without the paperwork? International FoFs allow Indian investors to access global opportunities through local channels.

4. Convenient for Beginners

If you’re new to mutual funds or prefer not to manage multiple schemes, FoFs simplify the process by bundling everything into one fund.

5. ETF Access Without Demat

ETF-based FoFs are ideal if you want ETF exposure but don’t have a Demat account.

Disadvantages of Investing in Fund of Funds (FoF)

As with any product, there are some trade-offs to keep in mind:

1. Double Layer of Costs

Since you’re investing in a fund that invests in other funds, you may be paying two sets of expense ratios—one for the FoF, and another for each underlying fund.

2. Taxation Rules Can Be Unfavourable

Most FoFs in India are taxed like debt funds, regardless of the equity exposure in the underlying schemes.

• Short-term capital gains (if held < 3 years): Taxed as per your income slab
• Long-term capital gains (after 3 years): Taxed at 20% with indexation

This tax treatment is different from equity mutual funds.

3. Dependent on Underlying Performance

Even if most underlying funds do well, a few underperformers could bring down overall returns.

4. Over-Diversification Risk

Too much diversification may dilute potential gains, especially if investments are spread thin across many funds.

5. Limited Investor Control

You’re relying on the fund manager to make allocation decisions. Unlike direct mutual fund investments, there’s less flexibility to pick or switch specific schemes.

Also Read: Different Types of Mutual Funds and Their Benefit

Who Might Consider Investing in Fund of Funds (FoF)?

FoFs aren’t for everyone—but they may be suitable for certain types of investors. Here’s who might benefit:

• First-time investors seeking simple diversification
• Busy professionals who prefer a hands-off approach
• Investors interested in international exposure
• Those pursuing long-term goals and looking for asset allocation across equity, debt, and gold
• Individuals without a Demat account who want ETF exposure

Things to Consider Before You Invest in Fund of Funds (FoF)

Before you invest in a FoF, weigh these points carefully:

1. Expense Ratio

Always check the Total Expense Ratio (TER) of both the FoF and its underlying funds. Higher costs can chip away at long-term returns.

2. Tax Implications

Don’t assume that all FoFs enjoy equity-like taxation. Most are treated like debt funds, which may affect post-tax returns.

3. Performance Risk

Market risk still applies. If underlying funds perform poorly, so will your FoF.

4. Liquidity and Exit Loads

Some FoFs—especially those tied to global funds—may have longer redemption cycles or exit loads. Read the scheme documents carefully.

5. Your Financial Objectives

Make sure the FoF’s strategy aligns with your financial goals and risk appetite. It’s always helpful to consult a financial advisor or relationship manager before making a decision.

Wrapping Up

A Fund of Funds can be a convenient way to build a diversified investment portfolio—especially if you’re new to mutual funds or short on time. Whether it’s for global exposure, multi-asset allocation, or simplicity, FoFs offer a lot in a single package.

That said, they come with layered costs, specific tax treatments, and limited control. So, it’s essential to review the pros and cons before choosing one. If you’re unsure, talking to a financial advisor can help you evaluate whether an FoF fits into your broader financial strategy.