Fund of Funds Full Guide for 2025
A Fund of Funds, also commonly abbreviated as FoF, is an investment approach in which a mutual fund or investment trust has invested in a blend of other funds rather than in stocks, bonds, or securities. The strategy allows investors to gain exposure to multiple asset classes, market themes and investment styles without picking the specific funds themselves.
Fund of Funds are on the increase in India because an increasing number of retail and institutional investors are seeking diversification and convenience in their investment portfolios. Popular funds are domestic and international equity FoFs, debt-based FoFs, and a combination of different funds known as hybrid FoFs. Fund of Funds are also being adopted by Indian investors with awareness and greater regulation clarity driving their adoption by 2025.
Why are Fund of Funds Gaining popularity in India?
- Portfolio diversification: This provides convenience to the investor who wants to have a diversified portfolio without having to conduct research on various different funds.
- Expanding services of leading Indian AMCs and global competitors in 2025.
- More specifications on the rules of consistent operations and protection of investors to be introduced by SEBI and RBI.
- Eases international investments and thematic investments to Indian retail investors.
How Does a Fund of Funds Work?
A Fund of Funds raises capital through the collection of funds like any other mutual fund. The fund manager does not purchase the direct securities with that money, but invests them in a portfolio of other funds. An FoF is affected by the performance of the underlying funds, their allocation and the strategy that is established by a fund manager.
Example: A global equity Fund of Funds can put in 30 percent in a US fund, 30 percent in a European fund, 25 percent in an Indian equity fund and the rest in emerging markets funds. These allocations are all chosen in order to balance the risk and maximize returns depending on the scheme objective.
Did you know?
In Indian Fund of Funds, in 2025, it is already invested in the range of [?]1.2 lakh crore, which is a 40 percent increase over 2023.
What are the Highlights or Key Features of Fund of Funds?
- Professional management: Sophisticated fund managers choose and frequently assess underlying funds.
- Diversification: Multiple funds, asset classes, markets and sectors are exposed under the same scheme.
- International accessibility of fund: A lot of FoFs provide a domestic investor with an easy access to international markets.
- Thematic and factor investing: ESG, technology, or factor-based FoF are some of the FoFs.
- Simple to invest and redeem: FoF units are invested by investors in much the same way as other mutual funds, i.e. either SIP or lumpsum.
- Simplified taxation: In India, most investment taxes are simplified and reporting is easy to the majority of investors.
- Reduced ticket size Start global or multi-manager investing as little as Rs 500 to 5000 monthly.
Wha are the Pros and Cons of Fund of Funds?
| Pros | Cons |
|---|---|
| Easy entry to diversified products | Possibly greater cost of entry. |
| Minimize fund selection risk | May be overlaps of underlying funds. |
| Professional selection and management | Tax efficiency may be reduced in comparison with direct funds. |
| Easy international investment | In some cases, the fees are doubled. |
| Easy to use and convenient to time-starved investors | The performance is based on the general fund performance. |
People Also Ask
Q: Will Fund of Funds be safe to Indian investors in 2025?
A: The capital is market risk and underlying scheme performance regulated and controlled by professionals.
Technologies of Fund of Funds in India by 2025
- Equity Fund of Funds - Invest in equity mutual fund baskets to be exposed to both a domestic and international stock market.
- Debt Fund of Funds - Specialize in investing in top-performing mutual funds in terms of moderate risk and consistent returns.
- Hybrid Fund of Funds - Is a mix equity and debt FoF that provides balanced risk reward.
- International Fund of Funds - Channel is an investment in international markets by investing in foreign funds.
- ETFs Fund of Funds - Invest in a variety of exchange-traded funds, which will be liquid and priced in real-time.
- Sectoral and thematic Fund of Funds - Specialise by industry such as technology, healthcare, ESG, or specific investment subject.
Did you know?
Within the context of the Indian FoFs regulations, SEBI enables each of the funds in 2025 to invest up to USD 1 billion internationally, which will make retail investors more international.
What is the difference between Fund of Funds and ordinary Mutual Funds?
| Feature | Fund of Funds | Regular Mutual Funds |
|---|---|---|
| Investment strategy | Indirect (through other investments) | Direct (stock, bonds, etc.) |
| Diversification level | High, multi-layered | Depends on fund objective. |
| Expense ratio | Could be greater (two-layer) | Generally lesser. |
| Indian taxation | DFT taxation | Debt fund taxation Based on underlying asset |
| International market access | Facilitated | Easy in most cases. |
| Who does investments | Professional MF managers | Professional MF managers |
In what ways do Fund of Funds: Costs and Expense Ratios
A Fund of Funds incorporates a Fund management fees to cover the fund administration and other fund operational expenses. It does this indirectly through paying fees to the underlying funds it invests in. SEBI limits maximum expense ratio (TER) of domestic FoFs to 2.25 percent and international FoFs to 2.50 percent as of 2025.
- Domestic FoFs: Expense ratios are normally 1.50 percent to 2.25 percent.
- International FoFs: Limited to 2.50 percent; commonly 1.80 percent to 2.40 percent.
- Depending on underlying investments, hybrid or thematic FoFs can take different fee structures.
People Also Ask
Q: Is there a problem of charges doubling in FoFs?
A: SEBI limits levels of expenses, and as a result of this, there is little direct debiting of underlying fund expenses, which ensures there is transparency to the Indian investors.
Taxation of Fund of Funds in India
Investors are supposed to know that Fund of Funds are generally subject to taxation as a debt mutual fund even when they invest in equities. Starting in April 2023, FoFs do not enjoy any long-term capital gains tax benefits regardless of the time the asset has been held.
- Short term: Taxed according to the income tax slab of an investor.
- None, even long holding periods.
- Dividends (where applicable): Taxed according to slab with deduction of TDS (where applicable).
- FoFs paying dividend of over 5000 in a financial year pays out TDS and then pays out to residents.
Did you know?
Union Budget 2024 did not introduce any additional changes to mutual fund tax regime in regard to Fund of Funds; hence, providing the investor with a stable regime in 2025.
Who needs to invest in Fund of Funds?
- New investors that want to diversify easily and with no need to study numerous schemes.
- Busy employees that want to use a professional approach in terms of allocating and overseeing assets.
- A local Indian platform and rupee-based investing Investors who may desire to invest abroad but would prefer a local Indian platform.
- The long-term risk-adjusted wealth creators.
- Investors who want to make sectoral or thematic bets but do not have time or knowledge to do research.
People Also Ask
Q: Is it possible to invest in NRIs in Indian Fund of Funds?
A: Yes, in case NRI are permitted to participate in the scheme and meet the compliance requirements.
The Choice of the Best Fund of Funds in 2025
- Look at the history but less emphasize on consistency and downside protection.
- Selection of underlying funds, sector allocation and policy of asset allocation.
- Compare expense ratios against such FoFs and direct funds.
- Review AMC reputation and track record of fund managers.
- Determine liquidity: How often NAV is calculated and Exit load?
- Align the investment objective and investment horizon with yours.
| Criteria | Fund of Funds example A | Fund of Funds example B |
|---|---|---|
| Past 3Y CAGR (2022-25) | 11.9% | 15.2% |
| Expense Ratio | 1.90% | 2.20% |
| Portfolio | Diversified 5 underlying funds | 7 underlying funds. |
| International Sharing | Yes | No. |
| Exit Load | 0.5% (6 mo) | 1% (12 mo) |
Did you know?
Indian retail investors had a choice of more than 200 open-ended Fund of Funds in February, 2025 in both equity and debt and hybrid and passive strategies.
Which is better between fund of funds and direct fund investments?
Although both are trying to assist investors in increasing wealth, direct funds and FoFs are different in terms of doing so:
- Direct investments involve the selection and monitoring of single funds.
- FoFs also have professional experts who select funds and rebalance your portfolio.
- Direct capital can be cheaper and be tax efficient to the seasoned investors.
- FoFs introduce the added convenience and may assist in global or thematic investment.
| Aspect | Direct Mutual funds | Fund of Funds. |
|---|---|---|
| DIY SelectionRequired | Yes | No. |
| Diversification | Requirement to develop | built-in. |
| Transparency | High | Slightly Lower. |
| Flexibility | High | Medium |
Is Fund of Funds a Good Idea in a Shaky Market?
FoFs offer wide diversification and expert manager-led selection of funds which can be more likely to sail through volatile times compared to funds with a narrow sector or geographic concentration. Nevertheless, in sudden market corrections FoFs will fall, too, when most underlying holdings are going down.
They are appropriate to moderate risk avers investors or those who want to minimize the effects of poor performance of certain fund managers.
People Also Ask
Q: How much does Fund of Funds need to invest in India?
A: The majority of FoFs will take SIPs at a rate of Rs 500 and above. Lump sum is between 1 000 and 5000 depending on AMC policy.
Six Major errors in investing in Fund of Funds
- Overlooking the overlap: Determine whether there are similar securities in underlying funds, which may decrease the benefits of diversification.
- In pursuit of previous year returns: It is about process and not last year performance.
- Failing to account to expense ratios: Exorbitant fees consume long-term compounding.
- Failure to review alignment with goals: What was the best FoF with your needs yesterday can change due to a change in objectives.
Expert View
According to Nandini Rao, Senior Mutual Fund Analyst, Bengaluru 2025, Fund of Funds have made it democratic to access global and multi-manager funds, yet the investor should monitor the cost-to-modify ratio, and the underlying overlap, and occurrence to match the objective.
Quick Recap or TLDR
- Fund of Funds are mutual funds that are umbrellas and invest in a number of other funds.
- Introduce diversification, professional management and the ability to access worldwide and niche portfolios.
- Suitable to beginners, busy professionals and those investors that would like to obtain broad exposure without needing to micro-management.
- Slightly higher expense ratio and tax as debt funds in India since 2023.
- Before investing, make sure to compare FoFs, according to process, fees, and fit to your objectives.
FAQ and People Also Ask
Q1: Is Fund of Funds superior to direct funds in 2025?
A1: FoFs are easy to diversify and professional portfolio managers, whereas direct funds might be cheaper and more tax efficient to experienced investors.
Q2: How much can I expect Fund of Funds to give me in 2025?
A2: Performance in the past has been varying, equity-oriented FoFs have been producing annualised returns of 10-15 percent on average, over 3 years by March 2025; further returns are dependent on markets.
Q3: Is there a lock-in period of Fund of Funds?
A3: The majority of open-ended FoFs will not contain lock-in although certain individual tax-saving FoFs may contain a lock-in per scheme requirement.
Q4: Can Fund of Funds have SIPs?
A4: Yes, systematic investment plans are usually offered in nearly all FoFs.
Q5: Are the international Fund of Funds exposed to currency risk?
A5: Yes, they can have currency risk depending on the fluctuations in rupee or dollar or any other currency that affect returns.
Q6: What is the frequency of NAV update of FoFs?
A6: NAV is published everyday on most open-ended Fund of Funds in the same manner as any other mutual fund.
Q7: What is the location of Fund of Funds performance and details?
A7: PORTALS Trusted Indian mutual funds, AMC websites as well as SEBI do give updated info and performance data.
Sources
- The Association of mutual funds in India (AMFI).
- SEBI Fund of Funds 2024 Guidelines.
- Overseas investment by FoFs RBI Roundels.
- Fund of Funds Analytics Morningstar India.
