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How to Invest in SIP A Beginner's Guide
In summary
A Fund of Funds gives you exposure to a portfolio of other funds through a single mutual fund investment.
- An FoF invests primarily in other mutual fund schemes or funds.
- The underlying funds determine much of the FoF’s actual market exposure and risk.
- FoFs can provide diversification across asset classes, markets, sectors, or investment styles.
- You pay expenses at the FoF level, and the underlying schemes may also have their own expenses.
- An FoF does not automatically have lower risk than a direct mutual fund.
- The Bajaj Broking website lets you explore mutual fund schemes after completing the required KYC.
An FoF can simplify fund selection, but you still need to understand its objective, underlying holdings, risk level, costs, and tax treatment before investing.
What is a Fund of Funds (FoF)?
A Fund of Funds is a mutual fund scheme that invests mainly in units of other funds. It does not normally build its portfolio by purchasing individual shares or bonds directly.
Underlying schemes include mutual funds, index funds, or exchange-traded funds. You receive FoF units, while the FoF holds units of underlying schemes.
This structure can combine different assets, markets, or managers. However, the FoF remains market-linked, and diversification cannot prevent losses.
How does a Fund of Funds work?
The FoF manager allocates pooled investor money among underlying schemes according to the scheme mandate. Changes in their values affect the FoF’s net asset value (NAV), which is calculated per unit.
The manager can rebalance within permitted limits. You delegate fund selection but retain the combined portfolio’s market, liquidity, and concentration risks.
Which types of Fund of Funds are available?
FoFs can be grouped by asset class, region, manager, or approach. Main types include:
| FoF type | Main exposure | Decision point |
|---|---|---|
| Multi-asset | Equity, debt, gold, or other permitted assets | Check the allocation range |
| International | Overseas mutual funds or ETFs | Check currency and country risk |
| ETF-based | exchange-traded funds (ETFs) | Check tracking difference and market volatility |
| Gold | Gold-linked underlying schemes | Check whether it helps diversify a portfolio |
| Multi-manager | Funds managed by different managers | Check portfolio overlap |
| Sector | sector-specific funds | Check concentration risk |
Regional, single-strategy, passive, and active FoFs also exist. Active fund managers adjust underlying funds.
Some non-retail structures invest in Hedge Funds using alternative investment strategies. Check each scheme’s investment strategy.
What benefits can a Fund of Funds provide?
A FoF can combine several exposures within one holding. Its main potential benefits are:
- Broader Allocation: A scheme can cover several asset classes.
- Professional Selection: The manager evaluates and monitors underlying schemes.
- Portfolio Rebalancing: The manager adjusts allocations within the scheme mandate.
- Simplified Tracking: You track one scheme instead of each underlying fund separately.
- Risk Distribution: Several holdings reduce dependence on one fund but cannot remove investment risk.
Repeated securities across underlying funds can reduce diversification.
How do FoF costs affect your investment?
FoF costs operate across two investment layers. The FoF charges its expenses, while expenses of the underlying schemes affect their NAVs.
The portfolio can include equity, debt, gold, international funds, or private equity funds, where permitted. Check plan type, exit load, turnover, and underlying expenses.
An exit load applies when the asset management company specifies one. Review the scheme documents because charges differ.
How can a FoF allocation work in practice?
Meera, aged 34 and living in Pune, plans to invest Rs. 5,000 per month for a 7-year goal. She compares a FoF allocating 50% to equity, 30% to debt, and 20% to gold.
The allocation uses this formula:
Allocated amount = Monthly investment × Allocation percentage
Her illustrative monthly allocation would be:
| Underlying exposure | Allocation (%) | Amount (Rs.) |
|---|---|---|
| Equity funds | 50% | Rs. 2,500 |
| Debt funds | 30% | Rs. 1,500 |
| Gold funds | 20% | Rs. 1,000 |
This illustration shows allocation, not expected returns. The manager can rebalance, and the actual NAV can rise or fall.
What are the limitations of Fund of Funds?
Review these FoF trade-offs before investing:
- Layered Expenses: FoF and underlying-fund expense ratios affect returns.
- Limited Control: You cannot replace individual underlying schemes.
- Portfolio Overlap: Different funds may hold the same securities.
- Liquidity Limits: Overseas or specialised funds can face investment or redemption restrictions.
- Additional Risks: International FoFs carry currency and country risks.
- Tax Differences: Similar-looking FoFs can receive different tax treatment.
The FoF label does not establish lower risk. Check the portfolio and Riskometer.
How can you invest in FoFs?
You can invest through SIPs or lumpsum investments. You can also apply through the relevant AMC, subject to its process.
Follow these steps:
- Set Your Goal: Define the amount and investment period.
- Compare Schemes: Review objectives, portfolios, risk profiles, costs, and exit loads.
- Complete KYC: Finish the required Know Your Customer verification.
- Select the Mode: Choose an SIP or a lumpsum investment.
- Place the Order: Enter the amount, review the details, and authorise payment.
Confirm redemption timelines, overseas limits, and minimums in the latest scheme documents.
How are Fund of Funds taxed?
FoF taxation depends on allocation, purchase date, redemption date, and holding period. This position for resident individuals was reviewed in September 2026.
| FoF tax category | Holding rule | Broad treatment |
|---|---|---|
| Qualifying equity-oriented FoF | More than 12 months for long-term classification | Eligible short-term gains are taxed at 20%. Eligible long-term gains are taxed at 12.5% above the aggregate Rs. 1.25 lakh exemption. |
| Specified debt-oriented FoF | Section 50AA rule | Eligible units acquired on or after 1 April 2023 are treated as short-term assets. Gains are taxed at the applicable slab rate. |
| Other non-equity FoF | More than 24 months for long-term classification | Short-term gains follow the applicable slab rate. Eligible long-term gains are taxed at 12.5% without indexation. |
The Income Tax Department’s 2026 Section 111A states the 20% short-term rate for eligible equity-oriented fund transfers. Updated Section 50AA applies 65% debt and money-market tests from 1 April 2026.
Equity-oriented classification requires prescribed 90% tests at the FoF and underlying ETF levels. Verify the rules on your redemption date and read about STCG. For historical comparison only, see Income Tax slabs for FY 2024-25.
What should you check before investing?
The SEBI Master Circular for Mutual Funds dated June 2024 covers mutual fund disclosures and operations. Check:
- Investment Objective: Confirm where the FoF can invest.
- Underlying Portfolio: Identify allocation and repeated holdings.
- Total Cost: Review the total expense ratio and underlying expenses.
- Portfolio Overlap: Check whether the underlying schemes hold the same securities.
- Riskometer: Match the stated category with your risk capacity.
- Liquidity: Check redemption timelines and restrictions.
- Tax Category: Confirm how the portfolio is classified.
- Performance: Compare complete market cycles, not one recent period.
Conclusion
A Fund of Funds invests in other funds, giving you a way to access multiple underlying schemes through one investment. It can simplify diversification and fund selection, but it also adds another layer of expenses and does not eliminate investment risk. Review the underlying funds, Riskometer, costs, tax treatment, and investment objective before investing.
Last reviewed: September 2026
Mutual funds are subject to market risk. Please read the scheme-related documents carefully before investing.
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Frequently Asked Questions
Understanding FoFs
Evaluating FoFs
Costs and diversification risks
How do funds of funds mutual funds differ from traditional mutual funds?
Traditional mutual funds invest directly in securities. FoFs invest in other funds, giving you combined exposure with another selection and expense layer to evaluate carefully.
What types of assets do funds of funds typically invest in?
FoFs can invest in underlying equity, debt, gold, international, index, sector, or multi-asset funds. You should check the scheme mandate for its permitted allocation limits.
What are the key considerations when evaluating funds of funds?
You should compare the objective, underlying portfolio, overlap, expenses, Riskometer, exit load, tax category, liquidity, investment period, and performance across complete market cycles very carefully.
What is the difference between MF and FOF?
When you invest in a mutual fund, it can buy securities directly. A FoF instead invests mainly in units of other funds for your portfolio.
Is fund of funds a good investment?
A FoF can suit you when its portfolio, costs, tax treatment, risks, and investment period match your goal. Diversification cannot prevent broad market-wide losses overall.
How do expenses of underlying funds affect a fund of funds' returns?
Underlying fund expenses reduce their net returns, while the FoF also charges its own expenses. Together, these costs lower the return that reaches you over time.
Can a fund of funds reduce portfolio diversification if its underlying funds overlap?
Yes. If underlying funds hold the same securities, sectors, or asset classes, the FoF may become concentrated. This overlap can weaken its diversification benefits.
Disclaimer
Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319
BFL does NOT:
(i) provide investment advisory services in any manner or form.
(ii) carry customized/personalized suitability assessment.
(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.
In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.
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Disclaimer on Risk-O-Meter:
Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc, and shall also consult their Professional advisors, if they are unsure about the suitability of the scheme before investing.
Disclosure: Bajaj Finance Limited (BFL) is a distributor of Mutual Funds with ARN - 90319 and distributes mutual funds of Bajaj Finserv Asset Management Limited (BFSAMC). BFL receives commission towards distribution of mutual fund products. BFSAMC is a group company of BFL, carrying business on arm’s length basis without any conflict of interest and in accordance with the prevailing law / regulation.
Disclaimer
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The information BFL contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed.
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Disclaimer
Mutual Fund SIP calculator may provide potential investors an approximate estimate on the maturity amount of the monthly SIP, purely based on mathematical calculation of the projected annual return rate selected by investor. However, such calculation does not factor the actual performance by the Asset Management Company (AMC) and should not be treated as any advice or assurance about the actual return of investment. Mutual Funds do not have a fixed rate of return and it is not possible to predict the rate of return. Please note that the SIP calculator are for illustrations only and do not represent actual returns which may vary depending on various factors including but not limited to actual performance, expense ratio, taxation, exit load (if any), etc.