Fund of Funds (FoF) Explained

A Fund of Funds holds units of other mutual fund schemes rather than buying securities directly. In India the structure is most common for international exposure, gold and silver, and multi-asset allocation.

Why the structure exists

• International access without a foreign brokerage account or overseas paperwork.
• Gold and silver exposure with SIPs and no demat account, by holding an ETF underneath.
• Ready-made asset allocation across several underlying funds in one purchase.

The cost of the extra layer

You pay the FoF's expense ratio and, indirectly, the underlying scheme's. SEBI caps the total, but an FoF is still structurally costlier than holding the underlying fund directly when that option is available to you.

Check what sits underneath

An FoF's returns are the underlying fund's returns minus the extra cost, so evaluate the underlying holding first. For overseas FoFs, remember that the rupee's movement against the underlying currency affects your return independently of how that market performed.