A Fund of Funds (FoF) is a type of investment fund that invests in other mutual funds, hedge funds, or investment funds, rather than directly in stocks, bonds, or other securities.
In simple terms, instead of picking individual investments, a Fund of Funds picks other funds to invest in aiming to offer diversification and professional management in one product.
Invest in other mutual fund schemes.
Common in global markets, these invest in multiple hedge funds to spread risk.
Invest in various private equity funds for broader exposure.
Indian mutual funds may offer FoFs that invest in overseas funds (e.g., US-based ETFs).
Suppose a Fund of Funds in India invests in 5 different mutual fund schemes:
An investor in this FoF gets exposure to all these categories through a single investment.
Spreads investment across multiple funds and asset classes, reducing risk.
Both the FoF and the underlying funds are managed by experts.
FoFs can give retail investors access to international markets or niche sectors.
No need to research multiple funds individually; one fund handles that.
You pay fees for both the FoF and the underlying funds, which can eat into returns.
If multiple underlying funds hold similar stocks, diversification may be less effective than it appears.
In India, most FoFs are treated as debt funds for taxation, even if the underlying funds are equity-based (unless the FoF invests in only Indian equity funds).