People in India want to grow their savings but they do not have the right knowledge and are even afraid of investing in the stock market. If you are one of these people, then a fund of fund strategy might be the right way to invest. It is a simple way where the experts manage your savings while you sit back and watch.
FOF full form is Fund of Funds and in the world of finance, the FOF meaning is quite easy to understand. It is a type of mutual fund that does not buy stocks or bonds directly. Instead, a FOF mutual fund takes the money it gets from investors and uses it to buy units of other mutual funds. Imagine it as a “collection of collections”. If a regular mutual fund is a basket of fruits, a fund of fund is a large box that contains many different fruit baskets.
So, what is FOF in mutual fund terms for the average Indian investor? It is a tool that offers double protection. A regular fund manager picks the best stocks, but an FOF manager picks the best fund managers. More than 5 crore Indians now invest in mutual funds, and FOFs are a growing part of this list.
What is a Fund of Funds?
A Fund of Funds (FOF) is a unique investment plan where one mutual fund scheme invests in other mutual fund schemes. This is different from a traditional mutual fund. In a traditional fund, the manager uses your money to buy assets like company shares or government bonds directly. In an FOF, the manager creates a portfolio using existing mutual funds as the building blocks.
There are two main ways these funds are structured. Some are called “fettered” funds. This means the FOF only invests in other funds managed by the same company. For example, an ICICI FOF might only buy other ICICI funds. Others are called “unfettered” funds. These have the freedom to buy funds from any company in the market, allowing the manager to pick the top performers from across the industry.
| Feature | Traditional Mutual Funds | Funds of Funds (FOF) |
|---|---|---|
| What you can get | Direct stocks, bonds, or gold | Units of other mutual funds |
| Who manages it | One fund manager or team | A multi-manager approach |
| Risk level | Depends on the stocks or bonds chosen | Spread across many funds and styles |
| Number of managers | Single point of expertise | Benefits of several expert managers |
How Does a Fund of Funds Work?
It starts with pooling investor money. Thousands of people like you contribute small amounts, which create a large pool of capital. The FOF manager then uses this large amount to buy units of different mutual funds. This creates a “multi-layered” portfolio.
The Role of the Fund Manager
In an FOF, the fund manager does not spend their time researching individual companies. Instead, they research other fund managers and their performance. They look at how consistent a fund has been over 3 years or 5 years. They check if a fund house follows its promises. The manager then decides how much money to put into each underlying fund.
Advantages of the Multi-Manager Approach
The multi-manager approach is like having a team of experts instead of just one. Every fund house has a different strength. One house might be great at picking small companies, while another is better at safe government bonds. An unfettered FOF can pick the best small-cap fund from one place and the best debt fund from another. This approach also reduces what we call “manager risk.”
Read Also: Decoding Hedge Funds In India – Types, Advantages And Distinctions
Types of Fund of Funds
There are many types of FOFs available in the Indian market today. Each type serves a different goal. Depending on whether you want high growth or safety, you can choose the one that fits you best.
1. Multi-Asset Fund of Funds
A multi-asset FOF invests in a mix of equity, debt, and gold funds. The goal is to give you a balanced portfolio with one single investment. Financial experts often use the “Thali” analogy for this.
2. ETF-Based FOFs
Exchange-Traded Funds (ETFs) are funds that follow a market index like the Nifty 50. An ETF-based FOF allows you to invest in a basket of ETFs through a regular mutual fund application.
3. International Fund of Funds
Many Indian investors want to own shares of famous global companies like Apple, Google, or Amazon. However, investing directly in the US or European markets is very hard but in International FOFs you give them money in Indian Rupees, and they invest it in international funds.
4. Gold Fund of Funds
A Gold FOF invests in Gold ETFs, which track the market price of 24-karat gold. You can start a Systematic Investment Plan (SIP) in gold for as little as Rs.500. It gives you the same returns as physical gold without any storage worries.
Comparison of Popular Gold Investment Methods
| Feature | Physical Gold | Gold ETF | Gold FOF |
|---|---|---|---|
| Storage | Home or Locker (Risky/Fees) | Digital (Safe) | Digital (Safe) |
| Demat Account | Not Required | Required | Not Required |
| Making Charges | Yes (High making charges) | No | No |
| Liquidity | Medium (Jeweler) | High (Trade on exchange) | High (Redeem with AMC) |
| Small Investment | Not easy | Can be done | Very easy (via SIP) |
Other types of FOFs
- Sector specific FOFs: These funds focus here on specific sectors like technology or pharma, or specific countries.
- Passive vs. Active FOFs: Passive FOFs rely on simply following an index to keep costs low. Active FOFs try to beat the market by making smart choices.
- Hedge Fund FOFs: These are for very wealthy investors (HNIs). They use complex strategies to make money even when the market is falling. In India, these usually require a minimum investment of Rs.1 crore.
Read Also: Mutual Fund Factsheet: Definition And Importance
Best FOF Funds in India
| Fund Name | AUM (Rs.Cr) | 1 year return | 3 year return | 5 year return | Expense Ratio |
|---|---|---|---|---|---|
| ICICI Pru Bharat 22 FOF – Direct Growth | 2,500 | 27.37% | 27.89% | 27.03% | 0.12% |
| Motilal Oswal Nasdaq 100 FOF – Direct Growth | 6,082 | 21.88% | 31.47% | 18.33% | 0.22% |
| Kotak US Specific Equity Passive FOF Direct | 3,870 | 24.62% | 32.07% | 19.27% | 0.54% |
| DSP World mining Overseas Equity Omni FOF | 2,22,000 | 87.7% | 46.7% | 18.7-19.5% | 1.6-1.7% |
| ICICI Pru Thematic Advantage Fund FOF | 8,693 | 10.46% | 17.86% | 17.30% | 0.47% |
Advantages of Investing in FOFs
- Excellent Diversification: The main advantage of FOFs is that the investors get access to a variety of mutual funds by doing just one investment. This layered diversification protects the investors from sudden market swings. If one company or even one fund house gives a bad result then your overall loss can be limited.
- Professional Selection: There are thousands of schemes in India. An FOF manager uses institutional research to analyze performance, consistency, and risk. You get the benefit of this deep research without doing your own R&D.
- Ease of Access: FOFs provide access to funds that might be hard for you to invest in directly. This includes niche sector funds or international funds from global partners like Franklin Templeton or DSP BlackRock. You can manage a global portfolio with one single NAV (Net Asset Value) to track.
- Discipline and Rebalancing: When the market goes up, we want to buy more equity and as it goes down, we feel like selling. An FOF manager follows a strict plan, they even rebalance the portfolio based on market conditions, not emotions.
Disadvantages of Investing in FOFs
- Higher Layered Fees: Since an FOF invests in other funds, there are two layers of fees. You pay a management fee for the FOF itself. The underlying funds also have their own expense ratios.
- Diluted Returns: Diversification is a great option for safety, but too much of it can dilute your returns. If one fund in the FOF gives good returns, its impact might be reduced if the other four funds only give average returns.
- Tax Complexity: In India, FOFs are often taxed like debt funds, even if they invest in equity funds. This is because they do not invest directly in the shares of Indian companies. If you are in the 30% tax bracket, the short-term tax on an FOF can be quite high.
How to Invest in a Fund of Funds
The process of investing in an FOF is straightforward. You can do it online from the comfort of your home.
1. Complete Your KYC
The first step is always KYC (Know Your Customer). You need to submit your PAN card, Aadhaar card, and address proof. Most modern apps allow you to complete this digitally in a few minutes. You may need to do a short video verification to prove you are the person in the documents.
2. Choose the Right Fund
Look for an FOF that matches your financial goals. If you want to grow wealth over ten years, look for an equity-heavy FOF. If you want safety for a goal two years away, look for one with more debt and gold exposure. Always check the expense ratio and the track record of the fund manager before choosing.
3. Pick Your Investment Mode
- SIP (Systematic Investment Plan): This is one of the suitable and easy ways for most people.You invest a fixed amount like Rs.1,000 every month with discipline and help you buy more units when the market is low.
- Lump Sum: If you have good savings, you can invest it all at once. This is best if you know that the market is at a good price.
4. Track and Review
Once you invest, you have to keep an eye on it and check your fund’s performance every few months. Compare it to other similar FOFs as most apps will give you a detailed report of your returns and the current value of your portfolio.
Read Also: Types of Mutual Funds in India
Using the Pocketful App for Investing
Pocketful is an excellent platform for both new and experienced investors in India. In this you get a user-friendly way to manage your mutual funds and FOFs.
- Zero Brokerage: Pocketful provides zero brokerage on delivery trades, making it very affordable for the users.
- Simple KYC: You can complete your digital KYC and start trading in just minutes.
- One-Click Investing: They offer “Pockets,” which are curated baskets of investments based on themes like Green Energy or Digital India.
- Tools for Success: The app includes a Portfolio Analyser where you can easily identify risks and you also get a dedicated customer support team for your doubt and queries.
Conclusion
Fund of Funds (FOF) are a powerful way to make your financial life very easy. In FOF the investors get a safety net as there is a multi-layer diversification and you can reduce your stress by not choosing the individual mutual funds. While your expenses are little due to fees and even a unique tax structure, the professional management and ease of access to global markets and gold often outweigh these negatives. Whether you are a beginner looking for a balanced “thali” or a seasoned investor looking for global exposure, FOFs provide a structured and disciplined path to wealth.
For more market news and insights, download Pocketful – offering users zero brokerage on delivery trades and an easy to use platform designed for both beginners and experienced investors.
Frequently Asked Questions (FAQs)
Is a Fund of Funds safer than a regular mutual fund?
Generally yes as FOF is diversified across multiple funds and several fund managers, it is less likely to see extreme drops if one manager makes a mistake.
Can I invest in an FOF without a Demat account?
Most of the FOFs do not require a Demat account and you can easily buy them directly through an AMC or through apps like Pocketful just like regular mutual funds.
Why is the taxation of FOFs different?
In India, a fund is taxed as “Equity” only if it invests directly in Indian shares. Since FOFs invest in other funds, the law treats most of them as non-equity or debt funds for tax purposes.
Can I start an SIP with a small amount in an FOF?
Generally FOFs allow you to start an SIP with as little as Rs.500. This is one of the best ways for young professionals to start their investment journey.
Are the higher fees of FOFs worth it?
If you have the time and knowledge to pick and track five different funds yourself, you can save on the extra FOF fee. But if you want a “hands-off” experience and professional rebalancing, the small extra cost is often worth the convenience.
