Fund of Funds (FOFs): Meaning, Types, Risks, Advantages
In 2024, the Indian investment landscape continues to evolve, offering a plethora of opportunities for investors seeking diversified portfolios. Among these, Fund of Funds (FOF) stands out as a compelling option, combining the expertise of multiple fund managers and strategies under one umbrella. Fund of Funds, also known as a multi-manager investment is a type of mutual fund that invests in other investment funds rather than directly investing in stocks, bonds or other securities. Let’s understand more about this concept in detail.
Best Funds of Funds in India Based on 5Y CAGR
| Fund Name | Category | AUM (Rs. in cr) | 3Y CAGR (%) | Expense Ratio (%) | 5Y CAGR (%) |
|---|---|---|---|---|---|
| Motilal Oswal Nasdaq 100 FOF | FoFs (Overseas) | 6,586.76 | 23.61 | 0.24 | 24.51 |
| ICICI Pru Bharat 22 FOF | FoFs (Domestic) - Equity Oriented | 2,218.52 | 26.27 | 0.12 | 24.30 |
| ICICI Pru Thematic Advantage Fund | FoFs (Domestic) - Equity Oriented | 2,265.90 | 17.79 | 0.43 | 24.17 |
| DSP US Flexible Equity FoF | FoFs (Overseas) | 920.17 | 15.51 | 1.50 | 17.34 |
| ICICI Pru Passive Strategy Fund | FoFs (Domestic) - Equity Oriented | 173.27 | 14.77 | 0.18 | 17.01 |
| PGIM India Global Equity Opp Fund | FoFs (Overseas) | 1,455.86 | 14.82 | 1.42 | 16.79 |
| Nippon India Nifty Next 50 Junior BeES FoF | FoFs (Domestic) - Equity Oriented | 491.85 | 13.69 | 0.16 | 16.50 |
| Franklin India Feeder - Franklin U.S. Opportunities Fund | FoFs (Overseas) | 3,988.79 | 15.84 | 0.60 | 16.34 |
| Aditya Birla SL Financial Planning FOF Aggressive Plan | FoFs (Domestic) - Equity Oriented | 208.52 | 13.71 | 0.42 | 15.86 |
| Quantum Equity FoF | FoFs (Domestic) - Equity Oriented | 121.24 | 12.61 | 0.51 | 15.21 |
Disclaimer: Please note that the above table is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing. The data is derived from Tickertape Stock Screener and is subject to real-time updates.
Note: The data on the best fund of funds list is from 18th February 2025 and the data is derived from Tickertape Mutual Fund Screener using the following filters:
- Plan: Growth
- Category: FoFs (Overseas), FoFs – Gold, FoFs (Domestic) – Equity Oriented, FoFs (Domestic) – Debt Oriented
- CAGR 5Y: Sorted from Highest to Lowest
🚀 Pro Tip: You can use Tickertape’s Mutual Fund Screener to research and evaluate funds with over 50+ pre-loaded filters and parameters.
Overview of the Top 10 Fund of Funds
Motilal Oswal Nasdaq 100 FOF
Motilal Oswal Nasdaq 100 FOF invests in an underlying scheme that tracks the Nasdaq 100, focusing on large companies in technology, consumer services, and other segments listed in the United States. By holding units of the parent fund it gives local investors a straightforward way to gain exposure to well-known names in the American market.
ICICI Pru Bharat 22 FOF
ICICI Pru Bharat 22 FOF directs its assets into a fund replicating the Bharat 22 Index, which comprises a selection of government-run and other significant enterprises in India. Its portfolio covers sectors like banking, energy, and industrials, aiming to reflect the performance of major public sector organisations.
ICICI Pru Thematic Advantage Fund
ICICI Pru Thematic Advantage Fund allocates money across multiple themes—such as consumption and infrastructure—through various underlying funds. It adjusts these allocations in line with market trends, intending to include segments that might benefit from changing economic and business conditions.
DSP US Flexible Equity FoF
DSP US Flexible Equity FoF invests its corpus in an overseas equity scheme that invests in American firms across different industries. This structure allows local investors to access a range of companies in the United States without needing to trade directly on foreign exchanges.
PGIM India Global Equity Opp Fund
PGIM India Global Equity Opp Fund focuses on international stocks, aiming to capture returns from multiple regions and industries. It seeks out companies around the world, allowing investors to diversify beyond the domestic equity space.
ICICI Pru Passive Strategy Fund
ICICI Pru Passive Strategy Fund puts money into index-linked investments covering both equities and fixed income. By following broad market benchmarks rather than selecting individual securities, it offers a route for those who want a simpler, index-based approach.
Nippon India Nifty Next 50 Junior BeES FoF
Nippon India Nifty Next 50 Junior BeES FoF channels its assets into the Junior BeES ETF, which mirrors the Nifty Next 50 Index. This index features companies ranked just below the top 50 by market capitalisation, providing a way to invest in emerging large-cap names.
Franklin India Feeder – Franklin U.S. Opportunities Fund
Franklin India Feeder – Franklin U.S. Opportunities Fund invests in a parent fund that owns shares of American companies across various sizes and sectors. It gives investors access to the U.S. equity market through a single, locally available scheme.
Aditya Birla SL Financial Planning FOF Aggressive Plan
Aditya Birla SL Financial Planning FOF Aggressive Plan brings together different mutual funds to form a portfolio with a more significant tilt toward stocks. Although it includes some debt holdings, it mainly pursues equity-driven growth, catering to investors comfortable with higher exposure to the share market.
Quantum Equity FoF
Quantum Equity FoF allocates its resources among equity schemes from different fund houses, aiming for a consolidated stock-investment method. It periodically reviews and rebalances its holdings, seeking a mix of funds that balances cost and potential gains.
What is a Fund of Funds (FOF)?
A Fund of Funds (FOF) is an investment strategy that pools money to invest in a portfolio of other mutual funds or investment vehicles rather than directly investing in stocks, bonds, or other securities. In simple terms, the fund of funds scheme primarily invests in units of mutual funds. For example, a FOF might invest in a combination of equity, debt, and international funds, offering investors diversified exposure across various asset classes and geographies.
Types of Fund of Funds in India
The following are the types of top fund of funds in India:
- Asset Allocator or Multi-Asset Funds: Invest across different asset classes like equities, debt, and commodities.
- International Fund of Funds: Provides exposure to international markets by investing in global funds.
- Gold Funds: Gold funds are mutual funds primarily trading in gold securities. Depending on the asset management company, a fund of funds in this category may hold a portfolio of mutual funds or gold trading companies.
- ETF Fund of Funds: Investing in an ETF through a fund of funds is more accessible than directly investing in an ETF. This is because ETFs require a Demat trading account while investing in an ETF fund of funds, which has no such limitations.
How Fund of Funds (FOF) Work in India?
The Fund of Funds (FOF) strategy is designed to achieve broad diversification and optimal asset allocation by investing in a range of fund categories in a single portfolio. There are different types of FOFs, each following distinct investment approaches. The FOF can be structured as a mutual fund, hedge fund, private equity fund, or investment trust. Thus, expert fund managers select a mix of funds based on investment objectives. These investments are spread across various asset classes and sectors to broaden the scope of diversification. Finally, the FOF manager continuously monitors performance and rebalances the portfolio as needed.
Features of Fund of Funds (FOF)
Here is a list of features of fund of funds mutual fund scheme:
- Diversification: Spreads investment across various funds, reducing risk.
- Expert Management: Managed by seasoned professionals who select and monitor underlying funds.
- Access to Premium Funds: Enables investment in funds that may have high minimum investment requirements.
- Simplified Portfolio Management: Offers a one-stop solution for investors seeking diversified exposure.
Benefits of Investing in Fund of Funds
Let’s look at some of the promising advantages of investing in fund of funds mutual funds.
- Broad Diversification: Fund-of-funds schemes offer diversification by spreading investments across various underlying funds or asset classes. This helps reduce the exposure to any single investment, leading to portfolio stability.
- Professional Management: Benefit from the expertise of seasoned fund managers.
- Convenience: Simplifies investing by providing a diversified portfolio through a single investment.
- Risk Mitigation: FOFs help lower the risk linked to picking individual funds. By investing in a mix of funds, FOFs can lessen the impact of underperforming funds in the portfolio, thereby reducing overall investment risk.
How to Invest in Fund of Funds?
Here is a step-by-step guide on how to invest in FOF (Fund of Funds) in India:
- Research and Selection: Explore various FOFs, considering their objectives, portfolio, performance, expenses, and risks. Choose those that align with your goals.
- Select a Platform: Select a bank or financial institution for FOF investment.
- Open an Account: If needed, open an investment account by providing details and agreeing to terms.
- Select Funds: Pick FOFs based on your strategy after setting up your account.
- Decide Investment Amount: Decide on the investment sum, meeting minimum requirements of chosen FOFs.
- Place Order: Use the platform to buy FOF units, specify the amount or units, and confirm the transaction.
Who Can Invest in Fund of Funds?
Here is a list of investors who can invest in fund of funds in India:
- New Investors: Those who lack the expertise to build diversified portfolios.
- Long-term Investors: Looking for exposure to a mix of asset classes.
- Retirement Savers: Target date FOFs can be an ideal choice for retirement planning.
Factors to Consider While Investing in Fund of Funds
There are various factors that you should consider before allocating your resources to these funds. Let’s look at it.
- Investment Objective Alignment: Ensure the FOF’s objectives align with your financial goals.
- Expense Ratio: Consider the impact of higher fees on returns.
- Performance Track Record: Evaluate the historical performance of the FOF.
- Regulatory Environment: Stay informed about regulatory changes that may impact the performance of the fund-of-funds scheme and ensure compliance with the regulatory environment.
Limitations of Investing in Fund of Funds
Here is a list of potential limitations of investing in fund of funds:
- Higher Expense Ratios: Due to the layered structure, FOFs may have higher fees.
- Potential Overlap: Risk of investing in overlapping securities across different funds.
- Limited Control: Investors have less control over the FOF’s specific holdings. The fund manager’s decisions determine the fund’s makeup and strategy, restricting investors from customising the portfolio to their preferences or adjusting holdings in response to market changes.
- Performance Dependency: The performance of FOFs heavily depends on the performance of the underlying funds and the fund manager’s selection abilities. If the chosen underlying funds underperform or the fund manager fails to select top-performing funds, it can hurt the FOFs’ returns.
Taxation on Fund of Funds
Taxation of FOFs in India depends on the underlying assets. Equity-oriented FOFs are taxed like equity funds, while debt-oriented FOFs follow the taxation rules applicable to debt funds.
For equity-oriented funds:
- Short Term Capital Gains (STCG) apply if units are sold before 12 months and are taxed at 15%.
- Long Term Capital Gains (LTCG) apply if units are sold after 12 months and are taxed at 10% after a Rs. 1 Lakh exemption.
For other equity-oriented funds:
- STCG incurs regular tax rates if units are sold before 36 months.
- LTCG incurs 20% of tax with indexation and is levied if sold after 36 months.
To Wrap It Up…
Fund of Funds (FOFs) provide a diversified investment route through a single vehicle, offering various types to suit different objectives. With a unique blend of diversification, professional management, and convenience, this can be an attractive option for investors. However, due to the dependency on underlying funds and layered fees, investors need to do their own research and consider consulting a financial advisor before making any investment decision.
Most Popular Mutual Funds:
As an investor to have a diversified mutual funds portfolio, you might also like to know more about these different types of funds for investing –
Frequently Asked Questions (FAQs) on Fund of Funds
The definition of fund of funds is an investment strategy that holds the investment portfolio of other investment funds rather than directing investing into bonds, stocks, funds, or any other securities.
Based on the 5Y CAGR, here is a list of fund of funds that you can explore:
(a) ICICI Pru Bharat 22 FOF
(b) Motilal Oswal Nasdaq 100 FOF
(c) ICICI Prudential Thematic Advantage Fund (FOF)
(d) Nippon India Nifty Next 50 Junior BeES FoF
(e) DSP World Mining Fund
Note: This information is intended for educational purposes and should not be construed as a recommendation or advice.
No, most FOFs do not have a long lock-in period, allowing for relatively easy liquidity compared to certain other investment vehicles. However, specific terms can vary by fund.
The most critical limitation of FOFs is the higher expense ratios due to the additional fees charged by the underlying funds, which can impact overall returns.
FOFs invest in a portfolio of other mutual funds, offering broader diversification and professional management across multiple strategies, unlike traditional mutual funds that directly invest in stocks or bonds.
