Definition of FoF (Fund of Funds)
A Fund of Funds (FoF) is a mutual fund scheme that invests in other mutual fund schemes rather than directly in stocks, bonds, or other securities. The fund manager selects a portfolio of underlying mutual funds based on the FoF's investment objective.
FoFs are used to: provide access to international funds (Indian investors can invest in US, European, or global funds via FoFs), offer a single-fund solution for a diversified multi-asset portfolio, or invest in category-specific combinations (like a 'Best of Equity' FoF selecting top equity funds). Asset allocation FoFs automatically rebalance between equity and debt.
Key consideration: FoFs have a two-layer expense ratio — you pay the FoF's expense ratio plus the expense ratio of the underlying funds, making them more expensive than direct investing. International FoFs in India are also taxed as debt funds (at your income tax slab rate), regardless of the equity content of the underlying international funds. Evaluate whether the additional cost is justified by the specific access or convenience the FoF provides.