Fund of funds (FoF) explained
A mutual fund that invests in other mutual funds, with at least 95% in the underlying schemes.
A fund of funds (FoF) is a mutual fund scheme that invests in units of other mutual fund schemes instead of buying shares or bonds directly. The FoF holds the funds; the underlying funds hold the securities.
SEBI's scheme categories place FoFs under 'Other Schemes', with a minimum of 95% of total assets in the underlying fund or funds. Everything else on this page follows from that layered structure: two portfolios, two sets of expenses, and tax rules that look at what the FoF holds.
Key terms
- Underlying fund
- The scheme or schemes an FoF invests in. These can be domestic or overseas, active or passive.
- Domestic FoF
- Invests in Indian mutual fund schemes, for example a mix of equity and debt schemes or gold and silver passive schemes.
- Overseas FoF
- Invests in schemes that give exposure to markets outside India, by country, region or theme. This is a common route for Indian investors to reach foreign markets through a mutual fund.
- Look-through
- Reading through the FoF to the securities held by the underlying funds. Risk, overlap and tax all depend on what is underneath.
SEBI's FoF categories for schemes with multiple underlying funds
From the framework SEBI attached to its February 2026 categorisation circular. Each category can be offered as active (active underlying funds), passive (passive underlying funds) or both.
| Category | What it holds |
|---|---|
| Equity oriented FoF (Domestic) | Diversified or sectoral/thematic Indian equity schemes |
| Debt oriented FoF (Domestic) | Indian debt schemes across categories, or a single debt category |
| Hybrid FoF (Domestic) | Mixes such as aggressive (65-80% equity schemes), conservative (10-25% equity schemes), dynamic asset allocation or multi asset (at least 10% each in equity, debt and commodity schemes) |
| Commodity based FoF (Domestic) | Commodity funds investing in gold and/or silver |
| Overseas FoF | Overseas equity or debt schemes, country specific, region specific or thematic |
| Domestic and Overseas FoF | Both, with at least 35% each in domestic and overseas underlying schemes |
What the investor gets, and what it costs
- check_circleDiversification across several schemes, or access to a market or asset that is hard to reach directly, through one folio.
- check_circleTwo layers of expenses: the FoF's own expense ratio and those of the underlying schemes. The scheme information document discloses both.
- check_circleRebalancing between underlying funds happens inside the FoF, so the investor does not redeem and reinvest personally.
- check_circleWhere an FoF invests in ETFs, SEBI requires it to value those ETF units at their closing price on the stock exchange.
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How an FoF is taxed
The Income-tax Act, 2025, in force from 1 April 2026, decides an FoF's treatment by what it invests in. Old section numbers in brackets.
- check_circleEquity-oriented: only if at least 90% of the FoF is in units of a listed fund (an ETF) that itself has at least 90% in listed Indian equity (section 198(8), old s.112A Explanation). Then the equity rates apply: 20% short-term, 12.5% long-term above ₹1.25 lakh.
- check_circleSpecified mutual fund: an FoF with 65% or more in units of a debt-heavy fund. Units bought on or after 1 April 2023 are taxed at slab rate as short-term gains, whatever the holding period (section 76, old s.50AA).
- check_circleEverything else, such as most gold and international FoFs: long-term after 24 months at 12.5%, short-term at slab rate.
How V-A tests fund of funds
The definition question is simple: an FoF invests primarily in other mutual fund schemes. The trap is in the follow-up statements. 'An FoF has lower total cost because it is diversified' is false; it carries two layers of expenses. 'An FoF investing in Indian equity funds is always taxed as an equity fund' is also false; the tax test is the 90% ETF route, not the label.
Overseas FoFs appear in questions about international diversification, and the risks named are currency risk and the risks of the foreign market itself.
FAQs
What is a fund of funds in mutual funds?expand_more
A mutual fund scheme that invests in units of other mutual fund schemes, domestic or overseas, instead of investing directly in shares or bonds.
How much must a fund of funds invest in other funds?expand_more
Under SEBI's categorisation rules, at least 95% of total assets must be in the underlying fund or funds.
Is a fund of funds taxed like an equity fund?expand_more
Only if at least 90% is in a listed fund, such as an ETF, that itself holds at least 90% in listed Indian equity. Otherwise it is taxed as a specified mutual fund or under the general 24-month rule, depending on what it holds.
Why do fund of funds cost more?expand_more
The investor bears the FoF's own expenses and, indirectly, the expenses of each underlying scheme.
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