Funds of Funds – Definition, Benchmarks, Features and Investment Options

A fund of funds (FoF) is a type of mutual fund scheme that invests its corpus into other mutual funds or ETFs instead of directly holding securities. Depending on the scheme, these underlying funds may include equity, debt, hybrid, or commodity-focused instruments.

FoFs can be open-ended (investors can enter and exit anytime) or close-ended (locked in for a specified duration). They are often used to simplify portfolio diversification since one investment provides exposure to multiple funds and, in turn, numerous asset classes. 

Here are some key features that define FoFs: 

• Diversification: FoF provides exposure to multiple funds and asset classes through a single investment. 

• Professional Management: The AMC manages fund selection, allocation, and rebalancing. 

• Variety of Options: Investors can access equity funds, debt funds, hybrid funds, gold, silver, and even overseas funds. 

• Flexibility: You can invest either as a lumpsum or through SIP. 

• Expense Structure: Since FoFs invest in other funds, there are two levels of expenses – the FoF’s expense ratio and that of the underlying funds. 

  Investors shall bear the recurring expenses of the fund of fund scheme, in addition to the expenses of other schemes in which the Fund of Funds Scheme makes investments.

• Liquidity: Most FoFs are open-ended and can be redeemed at any time, though exit loads may apply.

• Risk Levels: Risks vary depending on the underlying fund category, from low (debt FoFs) to very high (equity FoFs). 

   

In India, funds of funds are available in different formats, each offering distinct exposure and opportunities:

• Asset Allocation FoFs: These schemes combine different asset classes such as equity, debt, and commodities in one portfolio. The aim is to balance potential growth with stability by spreading investments across diverse instruments.

• Gold FoFs: Gold fund of funds invest in mutual fund schemes that primarily invest in physical gold or funds that hold stocks of gold mining companies. 

• International FoFs: These schemes invest in overseas mutual funds, allowing investors to participate in global equity or debt markets that may otherwise be difficult to access directly.

• Multi-manager FoFs: These funds invest across multiple mutual fund schemes managed by different fund managers. The idea is to diversify investment style and reduce dependence on a single portfolio strategy.

• ETF FoFs: Instead of buying ETFs directly through a demat account, investors can opt for FoFs that primarily invest in ETFs. These FoFs offer convenient access without the need for a trading account. Based on their risk profile and investment goals, investors can choose among different options, such as gold and silver ETF fund of funds for targeted exposure.

   

The benchmark for a fund of funds (FoF) is chosen based on the underlying assets in which it invests. This ensures that the fund’s performance is measured against an appropriate market index that reflects the risk, return profile, and asset class exposure of its portfolio.

Some common examples of fund of fund benchmarks include: 

• Equity FoFs: Benchmarked against equity indices such as Nifty 50 TRI, BSE Sensex TRI, or Nifty Midcap 150 TRI.

• International FoFs: Use global indices like S&P 500, NASDAQ 100, or MSCI World Index.

• Gold ETF FoFs: Benchmarked against the Domestic Gold Price Index.

• Silver ETF FoFs: Benchmarked against the Domestic Silver Price Index. 

It is important to note that benchmarks are used for comparison only. They do not represent guaranteed performance. 

Investing in fund of funds may provide several advantages for investors: 

• Convenience: A single fund of funds scheme can simplify investing by providing exposure to multiple funds and asset classes under one umbrella. 

• Access to New Markets: Options such as a gold ETF fund of funds or a silver ETF fund of funds may help you participate in commodities without directly holding gold or silver. 

• Diversification: By investing across different mutual funds, FoFs may help spread risk and reduce dependence on a single investment strategy. 

• Flexibility: There are FoFs tailored for short, medium, and long-term objectives, making them adaptable to different investment horizons. 

• Accessibility: Even with smaller investment amounts, FoFs can provide access to markets like international equity or commodities, which may otherwise be harder to reach directly. 

Tata Mutual Fund’s Fund of Fund Options 

Tata Mutual Fund offers several fund of funds schemes catering to different investor needs. Below are three FoFs options you can explore: 

An Open-Ended Fund Of Fund Scheme Investing in Tata Gold ETF

The Tata Gold ETF Fund of Fund is a fund of fund scheme that invests in units of Tata Gold ETF, offering exposure to domestic gold prices without the need to hold physical gold. To handle redemptions, a small part may also be kept in debt or money market instruments, but the core allocation remains gold-focused.

Key Highlights: 

• Invests 95–100% in Tata Gold ETF units 

• Up to 5% allocation in debt and money market instruments for liquidity 

• Transactions in ETF units can be done directly with the fund above a specified threshold limit or via stock exchanges 

• Core allocation focused on gold exposure, making it useful for diversification

It may be noted that risk-o-meter specified above is based on internal assessment. The same shall be updated as per provision no. 17.4.1.i of SEBI Master Circular on Mutual Fund dated 27.06.2024, on Product labelling in mutual fund schemes on ongoing basis.

An Open-Ended Fund Of Fund Scheme Investing in Tata Silver ETF

The Tata Silver ETF Fund of Fund provides investors a route to gain exposure to silver through the Tata Silver Exchange Traded Fund. This silver ETF fund of fund scheme may also use silver-linked derivatives where permitted, with a small portion set aside for liquidity.

Asset Allocation: 

• 95–100% in silver and silver-related instruments permitted by SEBI (including physical silver, ETFs, or commodity derivatives)

• 0–5% in debt and money market instruments, including units of mutual funds, primarily for liquidity needs 
   

It may be noted that risk-o-meter specified above is based on internal assessment. The same shall be updated as per provision no. 17.4.1.i of SEBI Master Circular on Mutual Fund dated 27.06.2024, on Product labelling in mutual fund schemes on ongoing basis.

The Tata Income Plus Arbitrage Active FoF is an open-ended fund of fund, which invests in a mix of domestic mutual fund schemes. Asset allocation primarily focuses on debt-focused funds (predominantly in Tata Corporate Bond Fund, An open-ended debt scheme predominantly investing in AA+ and above rated corporate bonds, with flexibility of any Macaulay Duration and relatively high-interest rate risk and moderate credit risk), with a portion allocated to arbitrage-based equity funds as well. Its investment philosophy is to seek long-term capital appreciation while maintaining relatively low volatility.

Portfolio Positioning: 

• 55–65% in units of debt-oriented mutual funds 

• 35–40% in units of arbitrage-based equity mutual funds 

• 0–5% in direct debt and money market instruments for liquidity 

The allocations are actively adjusted depending on interest rate movements, market valuations, and volatility trends. The scheme also rebalances within 30 business days if allocations deviate passively.

(The above product labelling assigned during NFO is based on internal assessment of the scheme characteristics and the same may vary post NFO when the actual investments are made. The same shall be updated as per provision no. 17.4.1.i of SEBI Master Circular on Mutual Fund dated June 27, 2024, on Product labelling in mutual fund schemes on ongoing basis.)

The Tata Nifty India Digital ETF Fund of Fund is an open-ended fund of fund scheme that invests primarily in units of the Tata Nifty India Digital ETF, offering investors exposure to the Nifty India Digital Index — a benchmark representing leading companies in India’s digital and technology sectors. 

This fund aims to provide long-term capital appreciation by participating in the growth potential of the country’s expanding digital ecosystem. To manage liquidity needs, a small portion of assets may be deployed in debt or money market instruments, though the core allocation remains ETF-focused.

(It may be noted that risk-o-meter specified above is based on internal assessment. The same shall be updated as per provision no. 17.4.1.i of SEBI Master Circular on Mutual Fund dated 27.06.2024, on Product labelling in mutual fund schemes on ongoing basis.)

Before putting money into a fund of funds scheme, it helps to weigh a few important factors: 

• Investment Goals and Strategy: Understand what the FoF is trying to achieve and check if this matches your financial goals, risk comfort, and investment style. 

• Costs Involved: Remember that FoFs carry their own expense ratio plus that of the underlying funds. These combined costs reduces your net returns over time. 

• Performance Track Record: Review how the FoF and its underlying funds have performed across different market conditions. Consistency matters more than just looking at short-term numbers. 

• Diversification Benefits: See what kinds of funds and asset classes the FoF invests in. A wide mix may help spread risk, but also check if there is too much overlap. 

• Fund Manager Expertise: Since FoFs rely on allocation decisions, the fund manager’s experience and track record can play a key role in outcomes. 

• Tax Treatment: Be aware that FoFs are taxed according to their underlying holdings (equity oriented or other than equity oriented). Check how this fits into your overall tax planning. 

• Investment Horizon: Match the scheme with your timeline. Some FoFs may suit long-term goals like retirement, while others may be positioned for shorter-term needs. 

What Are Sector ETFs? Understand The Key Benefits And Factors Before Investing

A fund of funds scheme can be a simple way to access different markets and strategies through investment in single scheme. It brings together mutual fund categories, commodities like gold and silver, and blended debt–equity approaches. By choosing options such as a gold ETF fund of fund, a silver fund of fund, or an allocation-based scheme, investors may achieve broader diversification without managing multiple schemes separately.