Fund of Funds
A fund of funds (FoF) is a mutual fund scheme that invested its corpus in units of other mutual fund schemes rather than directly in stocks or bonds, providing investors access to a diversified basket of funds through a single investment vehicle.
Fund of funds occupied a unique structural position in the Indian mutual fund ecosystem. Rather than building a direct portfolio of equities, bonds, or other securities, an FoF's portfolio manager selected and allocated to underlying mutual fund schemes — which could be equity funds, debt funds, gold ETFs, international equity funds, or any combination thereof. This two-layer structure gave investors exposure to multiple fund managers and investment styles through a single scheme.
The most prominent application of the FoF structure in India was in international investing. SEBI's regulations required that direct holdings of foreign equities by Indian mutual funds operated under a cumulative industry-wide limit. Many AMCs used the FoF route to invest in overseas feeder funds — for instance, a Mirae Asset NYSE FANG+ ETF FoF invested in an ETF tracking FANG+ companies listed in the US, or a Franklin India Feeder Franklin US Opportunities Fund invested in a Franklin global fund. This allowed Indian retail investors to gain US equity exposure without needing a foreign brokerage account or overseas remittance.
Asset allocation FoFs were another prominent category. These invested in a mix of equity and debt mutual fund schemes and were used by AMCs to create multi-asset solutions — such as a conservative, moderate, or aggressive asset allocation plan — entirely through existing fund schemes. Gold ETF FoFs allowed investors to hold gold ETF units without requiring a demat account, since the FoF itself held the underlying gold ETF units.
The two-layer cost structure was the primary structural disadvantage of FoFs. Investors bore both the expense ratio of the FoF itself and the weighted average expense ratio of the underlying schemes. While SEBI mandated that FoFs investing in other domestic funds could not charge total expenses exceeding the applicable TER slab plus the weighted average TER of underlying schemes, this still resulted in marginally higher costs than investing directly in the underlying funds. For international FoFs investing in overseas funds, however, there was often no direct alternative for retail investors, making the additional cost an acceptable trade-off for access.
Post April 2023, international FoFs and domestic equity FoFs that maintained less than 65 percent equity exposure were taxed at slab rates regardless of holding period, aligning their taxation with debt funds. This significantly changed the attractiveness calculus for long-term investors in international FoFs who had previously benefited from the 20 percent with indexation rate applicable to long-term gains.