Best Fund of Funds Mutual Funds in India (2026)

What Are Fund of Funds and How Do They Work?

Fund of Funds (FoFs) invest in other mutual fund schemes rather than directly in stocks or bonds. When investors invest in a FoF, the fund manager allocates the money across multiple underlying mutual funds.

These underlying funds may follow different strategies such as equity investing, debt investing, international investing, or multi-asset allocation.

Because FoFs invest through other mutual funds, investors gain exposure to a diversified portfolio managed by multiple fund managers and investment strategies.

SEBI classifies FoFs under the “Other Schemes” category.

SEBI's Classification Rule for Fund of Funds

SEBI classifies Fund of Funds under Other Schemes, separate from equity, debt, or hybrid mutual fund categories.

Key regulatory rules include:

• Minimum 95% of the portfolio must be invested in units of underlying mutual fund schemes
• FoFs invest in units of other mutual funds instead of directly buying stocks or bonds
• FoFs may invest in domestic or international mutual funds
• Asset management companies (AMCs) can offer multiple FoF schemes

SEBI describes this category as an open-ended fund of fund scheme investing in underlying funds.

How Do Fund of Funds Generate Returns?

Fund of Funds generate returns indirectly through the performance of the underlying mutual fund schemes they hold.

1. Equity-oriented underlying funds

If the FoF invests in equity mutual funds, returns come from capital appreciation as stock prices rise in the underlying portfolios.

2. Debt-oriented underlying funds

If the underlying funds invest in bonds or money market instruments, returns come from interest income and bond price movements.

3. Diversified multi-fund portfolios

Some FoFs combine multiple types of funds such as equity, debt, international funds, or commodity funds to create a diversified portfolio. The FoF’s overall return reflects the weighted performance of these underlying funds.

Because FoFs invest through other mutual funds, their returns depend largely on the performance of the underlying schemes.

Who Should Invest in Fund of Funds?

Fund of Funds may be suitable for:

• Investors seeking diversification across multiple mutual funds through a single investment
• Those who prefer a professionally managed portfolio of funds rather than selecting individual schemes
• Investors looking for access to global or specialised strategies through mutual funds
• Investors who want a simplified way to build a diversified portfolio

They may not be suitable for:

• Investors who prefer to directly select and manage their own mutual fund portfolio
• Cost-conscious investors seeking the lowest expense ratios
• Investors looking for simple single-strategy funds such as pure equity or index funds

Investors should evaluate their financial goals, risk tolerance, and investment horizon before investing.

Advantages of Fund of Funds

• Diversification across multiple funds

FoFs provide exposure to several mutual fund schemes within a single investment.

• Access to different strategies

Investors can gain exposure to strategies such as global equity, multi-asset allocation, commodity funds, or sector-based investments.

• Professional portfolio allocation

The fund manager decides how to allocate investments across the underlying funds.

• Simplified portfolio management

Investors can access multiple funds without needing to track or manage them individually.

Risks of Fund of Funds

• Dependence on underlying funds

Performance depends on the returns generated by the underlying mutual fund schemes.

• Higher cost structure

FoFs usually involve two layers of expenses - the expense ratio of the FoF and the expense ratios of the underlying funds.

• Limited control over underlying investments

Investors do not directly control which individual securities are held by the underlying funds.

• Market risk

Since underlying funds may invest in equities, debt instruments, or other assets, FoFs remain exposed to market fluctuations.

• Tax complexity

Different FoF structures follow different tax rules depending on the type of underlying investments.

Investors should carefully review the scheme details before investing.

Taxation of Fund of Funds

Tax treatment for Fund of Funds depends on the type of underlying investments.

1. Equity FoFs (90%+ in equity-oriented funds)

These are treated as equity-oriented mutual funds for tax purposes.

Short-term capital gains (STCG)

• Holding period: 12 months or less
• Tax rate: 20%

Long-term capital gains (LTCG)

• Holding period: More than 12 months
• Tax rate: 12.5% on gains above ₹1.25 lakh in a financial year

2. Non-equity FoFs (international, gold, or debt FoFs)

These are generally treated as non-equity mutual funds for taxation purposes.

Short-term capital gains (STCG)

• Holding period: 24 months or less
• Tax rate: taxed at the investor’s income tax slab rate

Long-term capital gains (LTCG)

• Holding period: More than 24 months
• Tax rate: 12.5%

Because FoFs also involve two layers of expense ratios, investors should evaluate both taxation and costs before investing.