ETF vs FOF: What’s the difference?

There is a structural difference between FOFs and ETFs, that is Fund of Funds (FOFs) invest in other funds, but Exchange-Traded Funds (ETFs) invest directly in assets and trade on exchanges.

However, there are more differences between ETFs and FOFs than most investors understand, from liquidity to tax treatment.

This blog evaluates the key differences between ETFs vs FOFs and explains the benefits of investing in both assets.

What are Exchange Traded Funds (ETFs)?

An ETF is a type of mutual fund that is listed and traded on stock markets. It follows an underlying index such as the Sensex, Nifty 50, gold prices, or even global indexes. Before moving to the differences between ETFs vs FOFs, you need to first understand what ETFs and FOFs are.

Investing in an ETF is equivalent to purchasing units of a fund that replicates the performance of an index. For instance, if you purchase a Sensex ETF, you are investing in the same percentage of each company in the Sensex index. Your ETF unit’s value fluctuates together with the index.

What are Fund of Funds (FOFs)?

An FOF is a fund that makes investments in a variety of different mutual fund schemes. The portfolio may include schemes from the same or separate fund companies. They are often tailored to the investors’ investment objectives and risk tolerance. These funds may also include international schemes.

Having a proper knowledge of FOFs helps you to evaluate the differences between ETFs vs FOFs more clearly.

What are the Differences Between ETFs and FOFs?

The key differences between ETFs and FOFs are based on their price, liquidity, costs, and other parameters. The ETFs and FOFs have become a popular investment choice among Indians. According to the Economic Times, as of October 2025, around 16 silver-based ETFs and FoFs have provided returns above 100%.

However, to understand the differences between ETFs vs FOFs more deeply, you need to check out the table below:

How Do ETFs Work in India?

Now that you have understood the differences between ETFs vs FOFs, let us understand how ETFs and FOFs work in India. The pointers below demonstrate how ETFs work in India:

1. ETFs function similarly to any listed securities and are governed by SEBI in India.
2. Using a ‘creation basket’ of securities, authorised participants create ETF units.
3. At prices set by the market, investors purchase and sell these units on the stock exchange.
4. The price often reflects the underlying index’s or asset’s NAV.
5. Since ETFs are passive funds, their goal is to match the benchmark rather than surpass it.

How Do FOFs Work in India?

The pointers below show how FOFs work in India:

1. FOFs are mutual funds that are either actively or passively managed. They mix up your money to invest in other mutual funds or ETFs rather than making direct stock investments.
2. The role of a fund manager is to choose and distribute funds among different underlying funds. Allocating assets according to themes, regions, industries, or even commodities.
3. Based on the performance of the underlying schemes, FOF’s NAV is adjusted once per day.

Benefits of Investing in ETFs

Along with the differences between ETFs and FOFs, understanding the benefits of investing in these securities is also crucial. Here are the benefits of investing in ETFs:

1. ETFs are instantaneously liquid, as they can be traded like stocks all day long.
2. The ETFs have a very low expense ratio, which means you can make affordable investments.
3. ETFs are transparent, and you are fully aware of the fund’s holdings.
4. In ETFs, you can get diversification exposure to several equities or industries at once
5. For the majority of ETFs, there are usually zero exit loads.
6. They are perfect for Do-It-Yourself (DIY) investors and excellent for market watchers.

However, if you are interested in DIY investing, you can download the PL Capital Group – Prabhudas Lilladher application. With PL Capital, you can get resources, professional advice, and best practices for profitable DIY trading and investing.

Benefits of Investing in FOFs

Here are the benefits of investing in FOFs:

1. FOFs are very easy to use, especially for beginners
2. FOFs provide you with access to international markets in the US or international funds.
3. You can make regular investments in FOFs with a systematic investment plan (SIP) 
4. You can invest in FOFs via mutual fund platforms without a Demat account.
5. FOFs also diversify your risk by investing in several funds from various regions.
6. Professionals responsibly manage the fund selection in FOFs.

Taxation Criteria of ETFs and FOFs

There are also differences between ETFs vs FOFs according to taxation criteria. Below are the taxation criteria:

• Taxation for ETFs

The time period an investor holds the ETFs determines the tax implications. Any capital gains obtained through the ETF will be classified as short-term capital gains (STCG) with a 20% tax obligation if the holding period is shorter than a year.

However, the capital gains are referred to as Long-Term Capital Gains (LTCG) if the holding term is more than a year. LTCG is tax-free up to INR 1.25 lakh. The tax rate would be 12.5% with no indexation advantages for amounts beyond INR 1.25 lakh.

• Taxation for Gold and Other ETFs

As per the 2025 taxation rules in India, if Gold ETFs or other non-equity ETFs are held for up to 12 months, the gains are treated as Short-Term Capital Gains (STCG) and taxed as per the investor’s applicable income-tax slab. 

If held for more than 12 months, the gains qualify as Long-Term Capital Gains (LTCG) and are taxed at a flat rate of 12.5%, without any indexation benefit.

• Taxation for FOFs

Earnings from a fund held for less than 2 years are regarded as STCG, which are added to your yearly income and subject to taxation at the relevant income tax rates.

The earnings are regarded as LTCG and are subject to 12.5% taxation in addition to indexation advantages if the fund is held for more than 2 years.

Which One Should You Choose Between ETFs and FOFs?

Choosing between ETFs vs FOFs totally depends on you. ETFs may be a better option for you if you currently have a Demat account, value the flexibility of intraday buying and selling, and want an inexpensive, index-tracking investment.

However, FOFs are a more practical choice if you do not have a demat account, want a more passive approach to investing, and feel at ease with SIPs.

Therefore, investment objectives, risk tolerance, and time horizon all play a role in the choice between ETFs vs FOFs.

Final Thought

Understanding the differences between ETFs vs FOFs really helps you to choose one of them. Your choice should be in line with your own investing objectives, risk tolerance, and level of familiarity with various financial platforms.

Investors may match their portfolio strategy with long-term financial goals by having a comprehensive grasp of ETFs vs FOFs. While investing in either ETFs or FOFs, you can download the PL Capital application and open a Demat account for free.

Frequently Asked Questions

• Which is better, FOFs or ETFs?

Based on the differences between ETFs vs FOFs, neither ETFs nor FOFs are inherently better. Rather, the best option will depend on your desired management style, cost sensitivity, and investment objectives.

• Are FOFs an effective investment?

For investors looking for ease, expert management, and diversification, especially beginners or those with little capital, FOFs can be useful.

• What types of FOFs are there?

There are different types of FOFs. They are categorised under asset allocation, international, gold or commodity, sectoral or thematic, and ETF-based. They offer distinctive diversity through investments in multiple underlying mutual funds or ETFs.

• Are FOFs a suitable investment for beginners?

Yes, FOFs are suitable investments for beginners who have limited capital and are seeking convenience, diversification, and expert management.