What Is a Fund of Funds? Types, Advantages, Disadvantages & Taxation

Published on June 25, 2026 | 9 min read

Key Takeaways

A Fund of Funds (FoF) invests in other mutual funds instead of direct securities.
FoFs provide exposure to gold, international markets, debt and diversified portfolios.
Most FoFs have higher expense ratios than regular mutual funds.
Most FoF gains are taxed at the investor's applicable income tax slab rate.
Always compare an FoF's costs, taxation and underlying funds before investing.

If you have explored ways to invest in international stocks and mutual funds, you may have come across something called a Fund of Funds (FoF). A question then naturally arises: what is the difference between a mutual fund (MF) and an FoF?

Well, a regular MF invests directly in stocks, bonds or other securities, and an FoF invests in other mutual fund schemes. This structure makes FoFs a choice for investors looking for diversification, exposure to international markets, gold or multiple asset classes through a single investment.

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Let's understand what a Fund of Funds is, how it works, its benefits, drawbacks, taxation and whether it is the right choice for you.

What is a Fund of Funds?

The meaning of Fund of Funds is simple, a mutual fund scheme that invests in units of other mutual funds rather than directly investing in stocks, bonds or other securities.

So, instead of selecting individual investments, the FoF invests in one or more existing mutual fund schemes. The fund manager decides which funds to invest in and how much money should be allocated to each. Example Suppose you invest ₹10,000 in a Gold Fund of Funds. Instead of buying physical gold or gold-related securities, the FoF may invest your money in a Gold ETF. Similarly, an international FoF may invest in overseas mutual funds that track global stock markets.

How Does a Fund of Funds Work?

A Fund of Funds follows a two-layer investment structure.

Layer 1- Investors Invest in the FoF

The FoF collects money from investors just like any other mutual fund scheme.

Layer 2 - The FoF Invests in Other Funds

The fund manager then allocates this money across one or more mutual fund schemes based on the fund's investment objective.

For example, A Gold FoF may invest in a Gold ETF. An International FoF may invest in a US-focused mutual fund. A Multi-Asset FoF may invest in equity, debt, and gold funds. As a result, investors gain exposure to multiple assets through a single scheme.

Fund of Funds in India

Fund of Funds have become popular in India because they bring investment opportunities that may otherwise be difficult for retail investors to access directly. Today, FoFs are mainly used for,

International investing
Gold investing
Asset allocation strategies
Retirement-focused investing
Global thematic investing

For many investors, a Fund of Funds is a simple way to diversify without managing too many separate investment accounts

Types of Fund of Funds

Fund of Funds come in different forms, depending on their underlying investments. Here are some of the common types investors may come across.

International Fund of Funds

International FoFs invest in overseas mutual funds, giving investors exposure to global markets such as the United States, Europe and emerging economies.

These funds allow Indian investors to diversify beyond domestic stocks without opening a foreign trading account. Example - Many international FoFs invest in funds that track major US indices such as the S&P 500 or Nasdaq-100.

Gold Fund of Funds

A Gold Fund of Funds is slightly different from other Fund of Funds. Instead of investing across multiple schemes for diversification, a Gold FoF usually invests in a single Gold ETF managed by the same fund house. Even though many Gold FoFs invest primarily in a single Gold ETF, they are still classified as Fund of Funds because their underlying investment is another fund rather than physical securities.

Since both the FoF and the ETF track the price of gold, returns are determined by movements in gold prices. The main advantage of a Gold FoF is the convenience they offer. One can invest in gold without opening a demat account. Moreover, it makes SIP investing easier. However, this convenience may come at a slightly higher cost because investors indirectly bear the expenses of both the FoF and the underlying Gold ETF.

Multi-Asset Fund of Funds

Multi-asset FoFs invest across different asset classes such as equity, debt and gold through multiple underlying funds. The objective is to reduce portfolio risk while maintaining growth potential through diversification.

Target-Date or Life-Cycle Fund of Funds

These funds adjust their asset allocation based on a target year, such as retirement. In the early years, they allocate a higher portion to equity. As the target date approaches, the portfolio gradually shifts towards debt-oriented funds to reduce risk. Example - The Vanguard Target Retirement 2045 Fund is a well-known global target-date Fund of Funds.

ETF Fund of Funds

An ETF Fund of Funds invests in multiple exchange-traded funds (ETFs) instead of one. By this strategy, investors get diversified exposure to various markets, sectors or asset classes through a single scheme. Example - The iShares Core Moderate Allocation ETF (AOM) invests in a basket of equity and fixed-income ETFs to maintain a balanced risk profile.

Debt Fund of Funds

Debt FoFs invest in a portfolio of debt-oriented mutual funds that may hold government securities, corporate bonds or money market instruments. These funds are suitable for investors seeking relatively stable returns and income generation. Example - Franklin India Dynamic Accrual Fund of Funds invests in various debt schemes managed by Franklin Templeton.

Apart from the ones listed above, there are also specialised Fund of Funds such as Private Equity FoFs, Infrastructure FoFs, Real Estate FoFs, Commodity FoFs and Hedge Fund FoFs. However, these products are accessible for institutional investors or high-net-worth individuals (HNIs). They are not available on common platforms and their ticket size is also larger. Hence, retail investors cannot easily invest in them.

Benefits of Investing in a Fund of Funds

Easy Diversification

One of the biggest advantages of a Fund of Funds is diversification. Instead of investing in multiple schemes separately, a single FoF can provide exposure to various funds and asset classes.

Access to Global Markets

International FoFs make it convenient for Indian investors to participate in global growth opportunities. It spares investors from overseas investment procedures.

Convenience

A Fund of Funds can be purchased, tracked and redeemed like any other mutual fund. Most FoFs also allow SIP mode, making it more convenient for retail investors.

Professional Asset Allocation

The fund manager handles fund selection and allocation decisions. This reduces the need for investors to actively manage their portfolio.

Drawback of Fund of Funds - Higher Costs

Since there are two layers of fund management, costs can be higher. Investors pay,

Expenses charged by the FoF
Expenses charged by the underlying funds Higher costs can reduce overall returns over time.

How Are Fund of Funds Taxed?

Under current tax rules, most FoFs are classified as Specified Mutual Funds because they invest primarily in units of other mutual funds. For units purchased on or after April 1, 2023, capital gains from these funds are generally taxed according to the investor's applicable income tax slab rate, irrespective of the holding period.

Equity mutual fund tax benefits may not apply to most Fund of Funds schemes.

Since tax rules can change over time, investors should check the latest regulations before making investment decisions.

Funds vs Mutual Fund

Feature	Fund of Funds	Regular Mutual Fund
Investment Style	Invests in other funds	Invests directly in securities
Diversification	Depends on underlying investments	Depends on the fund
Expense Ratio	Generally higher	Usually lower
Management Layers	Two	One
Convenience	High	High

Fund of Funds vs ETF

Feature	Fund of Funds	ETF
Demat Account Needed	No	Yes
SIP Facility	Easy	Limited
Trading During Market Hours	No	Yes
Cost	Usually higher	Usually lower

Should You Invest in a Fund of Funds?

A Fund of Funds may be suitable if you,

Want diversification through a single investment.
Prefer professional asset allocation.
Want exposure to international markets or gold.
Do not want to manage multiple mutual fund schemes.

However, in case you prioritise cost efficiency, investing directly in the underlying fund or ETF may sometimes be a better option.

Things to Check Before Investing

Before investing in a Fund of Funds, consider the following:

What underlying funds does the FoF invest in?
What is the total cost of the FoF and underlying funds?
Does the investment objective match your goals?
How is the scheme taxed?
Can you access the underlying investment directly at a lower cost?

A Fund of Funds can be a convenient way to access diversified investment strategies through a single scheme. By investing in a portfolio of mutual funds, ETFs or international funds, FoFs help investors spread risk and gain exposure to asset classes that may otherwise be difficult to access directly.

However, investors should evaluate the underlying funds, costs, and investment objectives carefully before investing. Like any mutual fund investment, a Fund of Funds should align with your financial goals, risk appetite and investment horizon.

Frequently Asked Questions

Is a Fund of Funds a good investment?

A Fund of Funds can be a good investment for investors seeking diversification, convenience, and exposure to multiple asset classes through a single scheme.

Can I invest in a Fund of Funds through SIP?

Yes. Most Fund of Funds allow SIP investments just like regular mutual funds.

What is the difference between a Fund of Funds and a mutual fund?

A regular mutual fund invests directly in stocks, bonds, or other securities, while a Fund of Funds invests in other mutual fund schemes.

Is a Fund of Funds better than an ETF?

It depends on your needs. ETFs are generally cheaper, while Fund of Funds offer greater convenience because they do not require a demat account.

About Author

Pradnya Surana

Sub-Editor

is an engineering and management graduate with 12 years of experience in India’s leading banks. With a natural flair for writing and a passion for all things finance, she reinvented herself as a financial writer. Her work reflects her ability to view the industry from both sides of the table, the financial service provider and the consumer. Experience in fast paced consumer facing roles adds depth, clarity and relevance to her writing.