Want diversification but don’t want to pick every fund yourself? FoFs might just be your shortcut—if you use them wisely.

If you’ve ever felt overwhelmed by the number of mutual fund options—large-cap, mid-cap, hybrid, international, sectoral—you’re not alone.

Now imagine a fund that invests in other mutual funds on your behalf, bundling a strategy or theme into one simple investment.

That’s exactly what Funds of Funds (FoFs) do.

Let’s explore what FoFs are, how they work, the pros and cons, and whether they deserve a place in your portfolio.

1. What Is a Fund of Fund (FoF)?

A Fund of Fund (FoF) is a mutual fund that doesn’t invest directly in stocks or bonds, but rather invests in a portfolio of other mutual funds.

These underlying funds could be:

• Actively managed equity or debt funds

• Index funds or ETFs

• International mutual funds

• Gold funds or even sectoral strategies

2. How Do FoFs Work?

You invest in the FoF → The FoF allocates your money to multiple mutual funds → You get diversified exposure without selecting each fund individually.

It’s like buying a curated combo meal instead of ordering 5 different dishes.

📦 Examples of common FoF structures:

• International FoFs (e.g., investing in U.S. or global equity mutual funds)

• Asset allocation FoFs (e.g., dynamically shifting between debt, equity, gold)

• ETF-based FoFs (e.g., a Nifty 50 + Nifty Midcap + Gilt ETF combo)

• Thematic FoFs (e.g., ESG, innovation, or business cycles)

3. Why Investors Choose Funds of Funds

✅ Built-In Diversification

You don’t need to choose or rebalance between 4–5 funds—the FoF manager does it for you.

✅ Easy Access to Global Markets

FoFs are one of the simplest ways to invest in international mutual funds or ETFs, especially U.S. tech or global themes.

✅ Simplifies Portfolio Construction

Ideal for new investors or those who want a single-point solution with strategic exposure.

✅ Dynamic Allocation

Some FoFs adjust between equity, debt, and gold based on market signals or rules—great for passive investors.

4. Where Funds of Funds Fit Best

🎯 Global Exposure

If you want to invest in U.S. markets (like Nasdaq 100 or S&P 500) or emerging economies, FoFs make it possible without remittance hassles.

🎯 Thematic Bets

Innovation, ESG, energy transition—if you believe in a theme but don’t want to pick stocks, a thematic FoF simplifies it.

🎯 Core+Satellite Portfolios

Use a FoF as your satellite to complement your Indian equity core.

🎯 Beginner Investors

New to investing? An all-in-one solution via an FoF can be a great starter strategy.

5. Drawbacks You Should Know

❌ Double Expense Ratio

Since you’re investing in a fund that invests in other funds, you pay:

• The FoF’s expense ratio +

• The underlying fund expenses

🧠 This can reduce net returns over time, especially if the underlying funds are actively managed.

❌ Tax Inefficiency (in India)

Most FoFs are taxed as non-equity funds, even if the underlying funds are equity-based. That means:

• Short-term gains (<3 years) = taxed at your slab

• Long-term gains (>3 years) = taxed at slab (post-2023, no indexation benefit)

✅ Exception: Some ETF-based FoFs with Indian equity exposure may qualify for equity taxation. Always check.

❌ Limited Control

You can’t customize exposure to specific sectors or funds—the allocation is managed by the fund house.

6. Fund of Funds vs Multi-Asset Funds

7. Should You Invest in FoFs?

Yes, if:

• You want international exposure without opening foreign accounts

• You value simplicity over micromanaging

• You’re looking to ride a broad investment theme (e.g., U.S. tech, ESG, etc.)

No, if:

• You already own a well-structured portfolio

• You’re sensitive to expense ratios and tax efficiency

• You prefer more control over fund selection and asset mix

TL;DR — Too Long; Didn’t Read

• Funds of Funds (FoFs) invest in other mutual funds—giving you instant diversification or access to global/thematic strategies

• They’re ideal for international exposure, simplified investing, or tactical allocations

• Downsides include double expense ratios and non-equity tax treatment in most cases

• Best used as satellite holdings, not core portfolios

• Always check underlying holdings, fees, and tax status before investing

📩 Not sure whether a Fund of Fund fits your strategy? Let’s evaluate your goals and build a clean, cost-aware portfolio that works smarter for your future.