A Fund of Fund (FoF) in invests in a portfolio of underlying mutual fund schemes or single scheme rather than directly in securities like stocks or bonds. For an actively managed fund, the fund manager selects and allocates investments across these schemes based on a defined strategy, with the objective of achieving diversification, professional management, and alignment with the fund’s investment goal. The underlying funds may span multiple asset classes, investment styles, sectors, and geographies, providing investors with comprehensive and well-balanced exposure through a single investment.
FoFs with multiple funds in the underlying may be suitable for investors seeking exposure to multiple asset classes or strategies through a single investment vehicle. They are also useful for accessing niche markets, such as international equities or commodities, which may otherwise be difficult for individual investors to manage.
A passively managed Fund of Fund (FoF) in India invests in underlying funds that follow a predefined index or strategy, rather than actively selecting or changing allocations based on market views. The FoF typically tracks a specific benchmark or mirrors a set of passive funds (such as index funds or ETFs), and the fund manager’s role is limited to maintaining the allocation and ensuring it stays aligned with the chosen structure. As a result, such FoFs offer a rule-based, low-intervention approach with limited portfolio changes, and their performance largely depends on the performance of the underlying passive funds rather than active decision-making.
Additionally, FoFs simplify investing by handling fund selection, monitoring, rebalancing, and compliance, offering convenience and professional expertise.
Fund of Funds invest in a portfolio of mutual funds, enabling investors to achieve diversification without managing several individual investments. Various types of FoFs are available to suit different investor needs: Broadly Fund of Funds are classified into two major types based on the underlying- if it is a single underlying fund or multiple ones are underlined.
A. FoF (Overseas/ Domestic): An open-ended fund of fund scheme investing in fund as a single fund underlying in the portfolio. Minimum investment in the underlying fund - 95% of total assets. The underlying scheme could either be domestic or an overseas one.
B. FOFs (multiple underlying funds): AMCs may launch FOFs with multiple underlying funds under the following broad categories:
- Aggressive Hybrid FoF
- o Equity: 65%–80%
- o Debt: 20%–35%
- Conservative Hybrid FoF
- o Equity: 10%–25%
- o Debt: 75%–90%
- Income + Arbitrage FoF
- o Debt: Up to 65%
- o Remaining in arbitrage-based schemes
- Dynamic Asset Allocation FoF
- o Invests in equity and debt schemes
- o Allocation is actively adjusted based on market conditions
- Multi Asset Allocation FoF
- o Invests in:
- o Equity schemes
- o Debt schemes
- o Commodity-based schemes (gold/silver)
- o Minimum 10% allocation in each asset class
4. Commodity-Based FoF (Domestic)
- • Invests in commodity funds such as:
- o Gold
- o Silver
- o Other commodities (as permitted by SEBI)/li>
5. Overseas FoF
- Equity-Oriented FoF (Overseas)
- Country-Specific Equity FoF
- Invests in equity markets of a single country
- Thematic/Sector-Based Equity FoF
- o Focuses on a specific theme or sector
- Region-Specific Equity FoF
- Invests across equity markets in a specific region
- Debt-Oriented FoF (Overseas)
- Country-Specific Debt FoF
- o Exposure to debt markets of a single country
- • Region-Specific Debt FoF
- o Exposure to debt markets of a specific region
6. Domestic + Overseas FoF
- Diversified Equity FoF
- o Invests in both domestic and overseas equity schemes
- o Not based on factors like momentum, quality, etc.
- o Minimum 35% investment each (domestic & overseas)
- Sectoral/Thematic Equity FoF
- o Invests in:
- o A single sector, or
- o A single theme, or
- o Multi-sector
- o Minimum 35% each in domestic & overseas markets
- Debt-Oriented FoF
- o Invests in both domestic and overseas debt schemes
- o Minimum 35% each in domestic & overseas markets
- Debt-Oriented FoF (Overseas)
- Country-Specific Debt FoF
- o Exposure to debt markets of a single country
- • Region-Specific Debt FoF
- o Exposure to debt markets of a specific region
Risks Associated
1. Risks from Underlying Schemes
FoFs carry all risks of their underlying funds, including market, credit, liquidity, and strategy risks. Performance depends on underlying fund managers, and any change in their strategy, NAV, or structure can directly impact FoF returns. Limited portfolio transparency and additional costs may further affect outcomes.
2. General Mutual Fund Risks
Investments are subject to liquidity constraints, market volatility, and potential default risk. Large redemption pressures or unfavourable market conditions may restrict liquidity and impact returns, including possible loss of capital.
3. Equity-Related Risks (via underlying schemes)
Equity investments are volatile and influenced by market and economic factors. Price fluctuations, liquidity constraints, and settlement issues may affect returns, while exposure to unlisted or less liquid securities can increase risk.
4. Debt & Money Market Risks (via underlying schemes)
Debt investments face credit risk, interest rate risk, liquidity risk, and reinvestment risk. Changes in interest rates can impact valuations, while lower-rated or unrated instruments carry higher default risk and potential loss of principal.
5. Overseas Investment risks (Via underlying scheme/s)
FoFs with exposure to overseas funds carry region-specific and geopolitical risks due to changes in regulations or government policies, along with currency risk arising from exchange rate fluctuations. They may also face global market volatility linked to economic or political developments across countries, as well as liquidity and regulatory differences across markets, which can impact valuations and ease of investment or redemption.
Advantages of Fund of Funds
1. Diversification
If a FoF invests in multiple underlying funds, it provides diversification across asset classes, sectors, styles, and geographies through a single investment. However, if it invests in a single underlying fund, the level of diversification depends solely on that fund’s portfolio.
2. Simplicity and convenience
Investors can conveniently gain exposure to multiple funds through a single FoF, eliminating the need to research or manage each fund individually when the portfolio includes multiple underlying funds. However, if the FoF invests in a single underlying fund, it still offers convenience, though diversification and tracking depend entirely on that one fund.
3. Professional fund selection
Underlying fund/s are selected and regularly monitored by experienced fund managers based on performance, risk, and market conditions, if it is actively managed. However, for passively manged schemes the fund managers track the benchmark index.
4. Access to specialized strategies
FoFs offer exposure to international markets, commodities, or niche investment themes that may otherwise be difficult to access directly.
5. Lower monitoring effort
Portfolio allocation and periodic rebalancing are managed by the fund manager, reducing the need for frequent investor monitoring.
6. Suitable for long-term goals
FoFs can be suitable for long-term financial objectives such as retirement planning or wealth creation, due to its diversification based on the underlying scheme.
7. Flexibility across market cycles
Actively managed FoFs, particularly asset allocation funds, dynamically adjust their underlying investments in response to market conditions to help manage risk and reduce volatility.
8. Portfolio-level cost efficiency
Instead of investing small amounts across multiple funds, investors can access exposure to one or more underlying funds efficiently through a single investment.
9. Equity taxation benefit
Fund of Funds that maintain the required equity exposure may be treated as equity-oriented funds for taxation purposes. In such cases, long-term capital gains are taxed at equity rates, which may be more tax-efficient than debt-oriented investments. Consult your tax advisor for tax related matter.
Conclusion
Fund of Funds offer a simple and professionally managed investment solution, providing exposure to one or more underlying funds or strategies through a single product. Depending on the structure, FoFs can offer diversification, expert fund selection, and ease of investing, making them useful for long-term portfolio construction. However, investors should choose FoFs aligned with their risk appetite, investment horizon, and financial goals, while also considering costs and tax implications.
Disclaimer:
The investor will be bearing the recurring expenses of the Scheme, in addition to the expenses of underlying scheme.
An Investor Education and Awareness Initiative.
Investors should deal only with registered Mutual Funds, details of which can be verified on the SEBI website (https://www.sebi.gov.in ) under ‘Intermediaries/Market Infrastructure Institutions’. Please refer to website of mutual funds for process for completing one-time KYC (Know Your Customer) including process for change in address, phone number, bank details etc. Investors may lodge complaints on https://scores.sebi.gov.in against registered intermediaries if they are unsatisfied with their responses. SCORES facilitates you to lodge your complaint online with SEBI and subsequently view its status.
Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully.
