What are Fund of Funds? Meaning, Types, Costs & Advantages

7 Aug 2025

When it comes to investing, one golden rule is “don’t put all your eggs in one basket.” But building a well-diversified portfolio can be tricky especially if you're just getting started.That’s where Fund of Funds (FoFs) come into play. These mutual funds offer a one-stop solution by investing in units of other mutual funds schemes, giving you the benefit of diversification without the hassle of picking individual schemes.

Let’s break down what FoFs are, how they work, their types, costs, advantages, and more.

Key Takeaways

• Fund of Funds are mutual funds that invest in other mutual funds, offering simplicity and built-in diversification.
• They come in various types including gold, global, asset allocation, and ETF-based funds.
• Suitable for beginners and small investors, FoFs offer access to professional management and wide asset exposure.
• They do come with higher costs and potential tax inefficiencies, so it’s important to weigh the pros and cons.
• With easy online access and SIP options, FoFs can be a smart addition to long-term investment plans.

What is Fund of Funds: A quick Definition

A Fund of Funds is exactly what it sounds like a mutual fund that invests in units of other mutual fund schemes instead of directly buying stocks or bonds. It's like hiring a fund manager whose job is to select the mutual funds schemes on your behalf, creating a layered investment approach.

Rather than navigating the entire mutual fund universe on your own, FoFs allow you to invest in a basket of funds through just one scheme. This approach is often referred to as multi-manager investing.

Why Layer Your Investments? The Core Idea Behind a Fund of Funds

A Fund of Funds (FoF) is a mutual fund scheme that invests in other mutual funds schemes, such as equity oriented, debt oriented, hybrid, international, or sector specific funds. This structure provides diversified exposure across asset classes through a single investment, without requiring investors to manage multiple schemes individually.

By layering investments this way:

• You reduce risk through broader exposure
• Gain access to different fund management styles
• Simplify portfolio management while still investing across asset classes

It’s a suitable model for investors who want to keep things simple without compromising on diversification. If you want to learn how to diversify your mutual fund portfolio effectively, read our guide on how to diversify mutual fund portfolio.

5 Different Types of Fund of Funds

FoFs are designed to meet different investment goals. Here are some of the most common types:

1. Asset Allocation FoFs

These invest in a mix of asset classes such as equity, debt, gold depending on market conditions or the scheme’s objective.

2. Commodity FoFs

Commodity FoFs invest in underlying commodity ETF like gold ETF or Silver ETF, allowing investors to gain broad exposure to commodities without directly holding them physically

3. International FoFs

Want global exposure? These FoFs invest in mutual funds or ETFs based in international markets. It’s a convenient way to invest in overseas market without opening a foreign account.

4. Multi-Manager FoFs

These invest in various actively managed funds, each overseen by different fund managers. This brings diversification in fund management styles too.

5. ETF FoFs

These invest in Exchange Traded Funds. They are perfect for investors who don’t have a Demat account but want to access ETFs.

If you want to understand more about mutual funds in general before diving into FoFs, check out our detailed guide on what are mutual funds.

Who Should Invest in Fund of Funds?

FoFs can be a good choice for:

• New or first-time investors looking for a hassle-free diversified portfolio
• Investors with limited capital who want access to a wide range of mutual funds
• People without in-depth knowledge of fund selection or asset allocation
• Long-term investors aiming to build wealth gradually over time
• Those seeking international exposure without complex paperwork

Essentially, if you want simplicity and diversification in one package, FoFs are worth considering.

Advantages of Investing in Fund of Funds

1. Diversification

Since FoFs invest in multiple funds, you get exposure to different asset classes, sectors, and geographies helping reduce risk.

2. Professional Management

You benefit from the expertise of several fund managers, each handling a different aspect of the portfolio.

3. Easy Access

Want global exposure or gold in your portfolio? FoFs offer access to niche areas that may be tough to reach on your own.

4. Suitable for Smaller Investors

Even with modest amounts, you can invest in a basket of high-quality funds through a single scheme.

5. SIP-Friendly

Many FoFs offer Systematic Investment Plans (SIPs), allowing you to invest small amounts regularly.

Limitations of Fund of Funds

While FoFs offer convenience, they’re not without drawbacks:

1) Higher Costs:

FoFs have their own expense ratio for managing the fund, and since they invest in other mutual funds, you also pay the charges of those underlying funds. This layering of fees can add up and impact your overall returns over time. To understand this better, check out our guide on total expense ratios in mutual funds.

2) Overlapping Holdings:

Some FoFs may invest in funds that hold similar stocks, reducing true diversification.

3) Less Control

You don’t get to choose the underlying funds directly, so you’re trusting the fund manager’s decisions entirely.

Things to Consider as an Investor

Before jumping into a Fund of Funds, keep these points in mind:

• Expense Ratio: Check the total cost, including the charges of underlying funds.
• Portfolio Duplication: Ensure the FoF actually adds diversification and isn’t repeating similar exposures.
• Tax Efficiency: Understand how the fund is taxed and whether it fits your overall financial strategy.
• Investment Horizon: Most FoFs are better suited for long-term goals.
• Objective Alignment: Make sure the FoF’s objective matches your own risk appetite and return expectations.

How to Invest in FoFs?

1. Complete Your KYC – Ensure your PAN, Aadhaar, and bank details are KYC-compliant before proceeding.
2. Select a Suitable FoF Scheme – Browse through Kotak’s Fund of Funds offerings and pick one that aligns with your investment objective whether it's global diversification, gold exposure, or balanced asset allocation.
3. Choose Investment Mode – Decide between a Systematic Investment Plan (SIP) or a lump sum investment based on your financial goals and cash flow preferences.
4. Track & Review – Monitor your investments through the Kotak Mutual Fund platform and review performance periodically to stay aligned with your goals.

Taxation of Fund of Funds

In general, Fund of Funds (FoFs) are subject to taxation as per the latest mutual fund tax rules applicable. The tax treatment depends on factors such as holding period and the nature of gains (short-term or long-term).

For complete details on applicable tax rates, surcharge, indexation, and other provisions, please refer to the Kotak Mutual Fund Tax Reckoner 2025–26.