Fund of Funds (FoF)

A fund that buys other funds

A Fund of Funds (FoF) doesn't pick individual stocks or bonds. Instead, its portfolio is made up of units of other mutual funds. The FoF manager's job is to choose and weight those underlying funds, giving investors a ready-made, diversified bundle in a single product.

Indian FoFs come in several flavours. Some hold a mix of the same AMC's equity and debt schemes to offer an all-in-one asset-allocation product. Others, very popular recently, are international FoFs that invest in overseas funds or ETFs, the simplest way for resident Indians to get exposure to US tech, Nasdaq or global indices. Gold and silver FoFs invest in the corresponding ETFs without needing a demat account.

The convenience-versus-cost trade-off

The appeal is convenience: one purchase, professional asset allocation, automatic rebalancing and no demat account needed. The drawback is a double layer of costs, the FoF's own expense ratio sits on top of the underlying funds' charges, so the total expense can be higher than holding the funds directly. SEBI caps the total expense ratio for FoFs to keep this in check.

Taxation is the key catch

Tax treatment is the most important nuance for Indian investors. After the 2023 and 2024 changes, many FoFs, especially those investing largely in non-equity or overseas funds, are taxed as debt-like or per their specific equity exposure, not necessarily as equity funds. The rules depend on how much the FoF holds in domestic equity. This can mean slab-rate or differently-rated taxation rather than the favourable equity regime, so investors must check a specific FoF's tax status before assuming equity treatment. For passive, hands-off investors wanting one-click diversification, especially abroad, FoFs are genuinely useful, provided you go in with eyes open on costs and tax.