What is Fund of Funds (FOFs)?

A fund of funds is a type of mutual fund that does not invest in assets like stocks, bonds, etc., directly. Instead, they invest in units of other funds and generate returns when those funds become profitable. As of FY25, about 5.20 crore Indians invested in mutual funds. As the popularity of mutual funds is increasing, learning about FoFs becomes important for a low-risk investment.

Understanding the meaning of Fund of Funds

Typically, mutual funds have the potential to generate a return of up to 12% annually, but are prone to market risks and are affected by a poor investment strategy. A clear fund of funds definition will help you understand how it reduces such risks:

1. When you invest in a fund of funds, your fund manager invests your money into units of other mutual funds.
2. This provides an added layer of security, as the money remains invested in underlying funds rather than directly in stocks or bonds.
3. Using expert investment insights, your fund manager selects funds by carefully assessing their past performance and profitability over the years.
4. Skilled fund managers can generate above-average returns from such funds. For example, if a fund shows 12% annualised growth over 5 years, your manager might invest INR 1 lakh expecting similar disciplined performance.

Types of Fund of Funds Available in India

As of 2025, about 10 mid-cap funds have delivered negative returns. If you are an investor who is seeking growth without tolerating risks such as this negative return, you must take a look at the following types of fund of funds:

1. Multi-Asset or Asset Allocator Funds

   Such funds reduce risk by diversifying into equities, debt, and gold. They target a high return from top-performing assets while stable ones balance risk. Suppose an investment of INR 1 lakh is diversified across equities at 15%, debt at 8%, and gold at 10%. If the equities perform well, it benefits from gains in the equities, while debt and gold stabilise the portfolio.

2. Exchange Traded Fund of Funds

   This option allocates your money into ETF-based mutual funds. This offers easier access than direct investing in ETFs. Unlike ETFs, it does not require a Demat or trading account. Thus, an exchange-traded FoF lets you diversify without extra accounts. You must note that FoFs, with ETFs, are sensitive to volatility as their trading nature is similar to that of stock market shares.

3. Gold Fund of Funds

   Such funds invest in other mutual funds tracking the performance of gold in the market. Investors often consider gold as a hedging tool against fluctuations in currency value, interest rates, etc. For example, due to the recent repo rate cut of 50 points, the current interest rate stands at 5.50%. This increases the value of gold, and such funds might benefit.

4. Single Strategy FoF

   As the name suggests, if you invest in such a fund of funds, your money is allocated in funds that focus on a specific strategy, such as an income fund, a growth-oriented fund, etc. Suppose the annualised 5-year return of a growth fund is 20.38%. If the fund can maintain this return, its respective FoF can capitalise on its profitability too.

5. Sector-Specific FoF

   This type of FoF targets high-performing funds in the market that invest in specific sectors or industries such as energy, technology, and healthcare. For example, the renewable energy sector in India is poised to grow at a CAGR of 8.77% till 2032. If funds that invest in such a sector make a profit, an energy sector-specific FOF also might grow.

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Benefits of investing in Fund of Funds

Now that you know the fund of fund meaning, and before choosing mutual fund investment plans, you must have a detailed look at the benefits of investing in FoFs:

1. In India, 327 out of 500 NSE stocks in the last 1 year reportedly delivered negative returns. In such a scenario, equity funds might incur losses, but due to investment spreading across multiple funds and asset classes, FoFs can minimise this risk.
2. As fund managers carefully assess the past performance of funds and then invest, it provides a hands-off approach for investors. Thus, you do not need to worry about portfolio rebalancing or asset allocation as your fund manager takes care of it.
3. As per the nature of funds of funds, it bundles multiple mutual fund options into one mutual fund scheme. Thus, you get a broader market exposure from a single scheme.

Drawbacks of investing in Fund of Funds

Expense ratio, reliance on fund manager and fund performance increase cost and chances of loss:

1. On average, the expense ratio of FoFs is higher than that of investing in other types of mutual funds. In India, the expense ratio of an FoF ranges between 1% and goes up to 2.25%.
2. FoF returns depend on the performance of underlying funds and the expertise of the fund manager. Poorly performing funds or failure of the fund manager to select a high-performing fund might lead to losses.

Suitable Types of Investors for Fund of Funds

A Fund of Funds (FoF) can be a suitable option for beginners in investing or for those with a limited budget who still want diversified exposure. It is also ideal for investors who prefer a relatively lower risk profile, as the money is allocated across multiple underlying funds rather than directly into stocks or bonds. This structure offers both diversification and professional management, making it easier for new investors to start their journey

Things to consider before investing in a Fund of Funds

1. Conduct research on the available FoF in the market before investing. Look for their NAV, annualised return, expense ratio, exit load, etc.
2. Once you have found a fund matching your investment goals, select it, choose how many units you want to buy and the investment horizon.
3. Invest in either a lump sum or an SIP as per your convenience. As per the SEBI, the minimum lump sum required is INR 100, and SIPs start from INR 500. However, your chosen fund may have a different investment amount.

Conclusion

When you invest in a fund of funds, it allocates your money into units of other mutual funds. It adds a layer of security in investments and, along with that, it diversifies your investment across different classes for risk reduction.

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Frequently Asked Questions

1. Can I redeem my investment in a fund of funds?

Yes, most FoFs are open-ended by nature, and you can withdraw investment. However, an exit load of 1% might apply if you withdraw funds before a specified period.

2. How does diversification work in a fund of funds?

When you invest in such a fund, your money is allocated across multiple mutual funds with stocks, bonds, commodities, etc., as underlying assets, promoting diversification.

3. Is a fund of funds a good investment for beginners?

Yes, investments in such funds are suitable for new investors and come with a lower level of risk.

4. Can I invest in a fund of funds through SIP?

Yes, you can start an FoF investment with an SIP starting from INR 500 as per the SEBI mandate.