Contents
Definition
A Fund of Funds (FoF) is a SEBI-categorised mutual fund scheme whose portfolio consists entirely — or primarily — of units in other mutual fund schemes, rather than direct equity or debt instruments. The underlying schemes may be domestic (e.g., an asset-allocation FoF holding equity + debt funds) or foreign (e.g., an overseas FoF holding units of a US-domiciled mutual fund or ETF). FoFs are an important structural vehicle in the international investing landscape: many Indian AMCs that want to offer exposure to a foreign fund (e.g., a Fidelity US equity fund or an iShares ETF) do so by creating an Indian-domiciled FoF that "feeds" into the target overseas fund, handling all LRS remittances at the fund level. The investor buys units of the Indian FoF in INR with no LRS paperwork required.
How an Indian investor accesses this
Through AMFI-registered distributors or direct MF platforms — identical to buying any other mutual fund. No minimum investment beyond the AMC's standard threshold (typically ₹500 SIP / ₹1,000 lump sum). The primary operational consideration is the double-layer expense ratio: the FoF charges its own management fee (typically 0.5–1.0% p.a.) on top of the expense ratio of the underlying fund. For an overseas FoF feeding into a US ETF with a 0.03% TER, total cost may be 0.53–1.03% p.a. For one feeding into an actively managed foreign fund (TER 1.5–2.0%), total cost can reach 2–3% p.a. SEBI caps the overall expense ratio of FoFs, but the cap is applied to the Indian-wrapper layer; underlying fund costs pass through separately in NAV calculation.
Tax treatment
The tax treatment of an FoF in India depends on the composition of the underlying fund. For overseas FoFs (investing in foreign funds): §50AA treatment applies post Finance Act 2023 — all gains taxed at income tax slab rate regardless of holding period, no indexation, no LTCG benefit. For domestic FoFs investing in equity-oriented schemes: if the FoF itself maintains ≥65% in domestic equity-oriented funds, it may qualify for equity taxation (15% STCG <12 months, 10% LTCG ≥12 months above ₹1.25L). The §50AA treatment for overseas FoFs was a particularly impactful change, as many investors held these long-term expecting 20% LTCG with indexation.
Currency consideration
Overseas FoFs carry the full INR-foreign currency exposure because the Indian FoF holds units of a foreign fund denominated in USD or EUR. NAV movements reflect both the performance of the underlying foreign fund and daily INR exchange-rate fluctuations. Hedging at the FoF level is rare but available from some AMCs as a separate plan variant. The academic case for international diversification rests on low correlation between Indian and global markets over full market cycles.
Worked example
Investors in an India-domiciled FoF (feeder into Nasdaq 100 ETF) pay: Indian FoF TER 0.6% + underlying QQQ ETF TER 0.20% = ~0.80% total annual drag. If Nasdaq 100 returns 12% in USD and INR depreciates 4%, gross INR return ≈ 16.5%. After 0.80% cost drag ≈ 15.7% NAV return. On ₹5 lakh invested, 3-year return ≈ ₹2.45 lakh gain (compounded). Under §50AA at 30% slab: ₹73,500 tax. Net gain: ₹1.72 lakh over 3 years — still materially ahead of many fixed-income alternatives, but the slab-rate tax removes the incentive to hold >3 years for preferential rates.
See also
Primary source
SEBI Circular CIR/IMD/DF3/83/2017 — Categorisation: Fund of Funds (Domestic and Overseas) category: sebi.gov.in. Finance Act 2023 §50AA: incometax.gov.in. AMFI — FoF TER disclosure guidelines. This content is educational and not investment advice. MintByte is SEBI-registered (ARN-314872, APMI APRN-01658).