What is a Fund of Funds? A Simple Guide For NRI Investors [2025]

A fund of funds (FOF) is a unique investment approach that puts your money into a portfolio of other investment funds instead of stocks or bonds directly. You can think of it as a master fund with several other funds under its management.

‍

The FOF industry has grown substantially since Leveraged Capital Holdings started it in 1969. Today, 1,200 to 1,500 funds of funds operate worldwide, and most of them launched in the last decade.

‍

When you invest in an FOF, your money goes into different types of funds:

• Mutual funds
• Hedge funds
• Private equity funds
• Exchange-traded funds (ETFs)

‍

Professional management makes FOFs stand out from regular investment options. A team of fund managers, analysts, and legal experts carefully picks and monitors the underlying funds. This setup helps remove poor performers while giving investors access to top-performing funds that individual investors usually can't reach.

‍

FOFs make diversification simple and accessible. Most hedge funds need minimum investments of USD 1 million, so building a diverse portfolio on your own can get very expensive. FOF managers also take care of watching the portfolio, which includes checking how well trades execute, maintaining consistent investment styles, and managing risks.

‍

These investments work through a pooled structure where many investors' money combines to create a larger investment portfolio. The real value comes from smart asset allocation, as fund managers spread investments across different strategies, sectors, and asset classes to control risk while seeking the best returns.

‍

FOFs offer flexibility in their investment approach. They can be either "fettered" and invest only in funds from the same investment company, or "unfettered" and put money into external funds managed by other companies.

‍

Can NRIs Invest in Fund of Funds in India?

‍

Non-resident Indians can invest in fund of funds schemes in India if they follow the Foreign Exchange Management Act (FEMA) regulations.

‍

You'll need one of these bank accounts to start investing:

• Non-Resident External Rupee (NRE) Account
• Non-Resident Ordinary Rupee (NRO) Account
• Foreign Currency Non-Resident (FCNR) Account

‍

Mutual fund houses in India accept investments only in Indian rupees. Your chosen account type for mutual fund investments must remain consistent for that particular scheme.
‍

You have two options to handle your investments. Direct investment through regular banking channels with your NRE/NRO account works well. You could also appoint a Power of Attorney (PoA) in India to manage investments for you. Both methods need a completed Know Your Customer (KYC) process. This requires your recent photographs, self-attested copies of Aadhaar, PAN, passport, and foreign residence proof.
‍

US and Canadian residents should note that many mutual fund schemes might not be available due to Foreign Account Tax Compliance Act (FATCA) requirements. Fund houses that accept investments from these countries need extra documentation and have specific eligibility criteria.

‍

Digital access has simplified the investment process. You can now buy, manage, and redeem your mutual fund investments from anywhere globally through online platforms. This feature also covers systematic investment plans (SIPs), which NRI investors can fully use.

‍

India's Double Tax Avoidance Agreements (DTAA) with many countries help prevent double taxation. These agreements let you claim tax credits in India on mutual fund gains if your country of residence has such an agreement with India.

‍

Benefits of Investing in FOFs for NRIs

‍

Fund of funds investments give NRIs a great chance to build wealth through Indian markets.

Expert fund managers take care of picking and tracking the underlying funds. This saves you precious time as you manage investments from different time zones. Their expertise really shines when you're investing from abroad.

‍

The currency advantage creates a great opportunity. You can buy mutual funds at better rates compared to your local currency. Your returns could go up if the Indian rupee grows stronger against your resident country's currency.

‍

The digital world has made FOF investments easier for NRIs. Your portfolio management is just a click away through online platforms that let you:

• Buy, switch, or redeem investments through AMC portals
• Set up and monitor Systematic Investment Plans (SIPs)
• Access detailed Consolidated Account Statements (CAS)
• Track monthly portfolio holdings through fund house websites

‍

FOFs are a great way to get ready-made diversification in asset classes, fund managers, and securities. NRIs who find it hard to track individual investments in different markets will appreciate this feature.
‍

You'll spend less on brokerage and custodial fees with FOF investments. The scale of these transactions means lower overall costs for investors. Strict regulations protect investor interests in FOFs. This brings peace of mind when you invest from overseas. You can also move up to USD 1 million per financial year through NRO accounts, which helps manage your international finances better.

‍

FOFs line up your asset allocation with your risk appetite. This well-laid-out approach keeps your portfolio balanced with your investment goals, whatever your location.

‍

Factors to Consider for NRIs Investing in FOFs

‍

NRI investors need to think about several key factors before putting their money into fund of funds investments. Investment Goals and Risk Assessment are the foundations of your FOF selection. Your investment timeline and risk tolerance will help you pick the FOF that matches your financial goals best.

‍

The reputation of fund houses is vital to investment success. Pick FOFs from well-established asset management companies that have solid track records and clear operational processes. A lower expense ratio leads to better performance as time goes by.

‍

Currency fluctuations create unique challenges for NRI investors. These changes are a big deal as it means that returns can shift a lot, especially during fund repatriation. Look for FOFs with built-in currency hedging or a proven history of managing currency risks well.

‍

The best FOFs for transaction convenience should have:

• Easy online transactions with reliable NRI support
• Simple documentation processes
• Quick repatriation channels

‍

Regulatory compliance is a vital part of NRI investments. Make sure your chosen FOF follows SEBI guidelines for NRI investors. Check if your country of residence allows such investments since some nations have restrictions.
‍

The diversification strategy of the FOF needs a full examination. Many FOFs talk about broad diversification, but you should examine their actual asset spread across sectors, locations, and investment styles. This matters even more for NRIs who want to balance their international portfolio exposure.
‍

Account management has practical aspects to consider. FOFs through NRE accounts let you repatriate fully, while NRO accounts have limits. Choose between these based on your long-term financial plans and repatriation needs.

‍

Tax implications of FOFs for NRIs

‍

NRI investors must pay close attention to tax regulations when investing in fund of funds. The tax treatment depends on the FOF type and how long you hold the investment.

‍

Short-term gains from holdings under 36 months in debt-oriented FOFs are taxed at income tax slab rates. These rates can go up to 30% plus surcharge and cess. You'll pay a 20% tax rate on long-term capital gains if you hold debt FOFs beyond 36 months.

‍

Tax authorities apply specific TDS guidelines for NRI investors. They deduct 30% TDS on both short-term and long-term capital gains from FOF investments. NRIs who don't provide their Permanent Account Number (PAN) will face higher TDS rates.

The rate becomes the highest of:

• 20% flat rate
• Rates specified in relevant provisions
• Rates currently in force

‍

NRIs can reduce their tax burden through Double Taxation Avoidance Agreements (DTAA) that India has with countries of all sizes. These agreements let you claim credit for taxes paid in India against your tax obligations in your country of residence.
‍

You'll need to get a Tax Residency Certificate (TRC) from your resident country's tax authorities. It also requires Form 10F submission to claim DTAA benefits.

‍

The India-UAE tax treaty offers special benefits to UAE-based NRIs. You can pay tax in UAE instead of India when selling mutual fund units. But you must meet specific residency requirements and keep proper documentation.
‍

Tax rules keep changing. Recent updates have changed some rates. Long-term capital gains tax on unlisted mutual funds is now 10% without indexation benefits. These changes show why you need to stay updated with tax regulations to plan your investments better.

‍

Top FOFs for NRIs in 2025

‍

1. Mirae Asset NYSE FANG+ ETF FoF tops the list with returns of 38.63% since mid-2024. 

‍

2. Mirae Asset Hang Seng TECH ETF FoF comes in second with 34.97% returns, while Mirae Asset S&P 500 Top 50 ETF FoF has achieved 28.74%.

‍

3. Aditya Birla Sunlife Flexicap Fund has generated 14.73% returns in one year and managed to keep 11.45% returns over five years. 

‍

4. UTI Mastershare Fund shows stability with 15.60% returns in one year and 12.63% over five years.

‍

5. NRIs looking for debt-oriented options should consider BHARAT Bond FOF April 2025. This fund manages ₹4,191.07 crores in assets and has yielded 7.8% returns in the last year. 

‍

6. Invesco India - Invesco Global Consumer Trends FoF and Motilal Oswal Nasdaq 100 FOF have achieved strong returns of 25.35% and 25.21% respectively. These funds give investors exposure to global market trends while following NRI investment rules.

‍

How to Choose The Right FOF as an NRI

‍

NRI investors should take a systematic approach to pick the right fund of funds. Your first step is to identify investment goals and match them with suitable FOF types.

‍

Investment Goal Alignment is the life-blood of FOF selection. Mutual fund houses now provide schemes that fit different objectives. You can choose between growth-focused equity FOFs and stability-oriented debt options.

‍

The expense ratio is a vital part of your selection process. Any FOF with an expense ratio above 1% should raise red flags. High costs can affect your long-term returns by a lot.

‍

You need a full picture of the fund manager's expertise. Look at their track record, how they manage portfolios, and their performance in different market cycles. Take time to check the fund house's research capabilities and risk management practices.

‍

Here are the key checkpoints to help you:

• Check SEBI registration and your country's investment rules
• Look through the fund's financial statements and management team's background
• Make sure investment objectives line up with your goals
• Take a close look at expenses and past performance

‍

Your account type selection is a big deal as it affects your decision-making process. NRE accounts let you transfer funds abroad freely. This makes them a better fit if you plan to move money overseas often.
‍

The paperwork needs your full attention. You'll need to complete KYC formalities and get tax residency certificates. If you live in the US or Canada, check if your chosen FOF schemes follow FATCA rules.
‍

FOFs with moderate assets under management strike the right balance between stability and flexibility. This becomes especially important when you think about future redemptions or portfolio changes.

‍

Frequently Asked Questions: Funds of Funds

‍

Q1. What exactly is a Fund of Funds (FOF) and how does it work?

A Fund of Funds is an investment strategy where a fund invests in other investment funds rather than directly in stocks, bonds, or other securities. It works by pooling capital from multiple investors to create a diversified portfolio of various funds, which can include mutual funds, hedge funds, or ETFs, managed by professional fund managers.

‍

Q2. What are the potential benefits of investing in a Fund of Funds?

Investing in a Fund of Funds offers several advantages, including professional management, broader diversification across multiple funds and asset classes, access to high-performing funds that might be closed to individual investors, and simplified portfolio management. It's particularly beneficial for investors seeking a hands-off approach to diversified investing.

‍

Q3. Are there any specific considerations for NRIs investing in Fund of Funds in India?

Yes, NRIs can invest in Fund of Funds in India, but they need to consider several factors. These include opening the appropriate bank account (NRE, NRO, or FCNR), complying with FEMA regulations, completing the KYC process, and being aware of any restrictions based on their country of residence, especially for US and Canadian residents due to FATCA requirements.

‍

Q4. How are Fund of Funds taxed for NRI investors?

The taxation of Fund of Funds for NRIs depends on the type of FOF and holding period. Short-term gains from debt-oriented FOFs held for less than 36 months are taxed at income tax slab rates, while long-term gains are taxed at 20%. A 30% TDS is applicable on both short-term and long-term capital gains. NRIs can benefit from Double Taxation Avoidance Agreements (DTAA) to optimize their tax liability.

‍

Q5. What should NRIs look for when choosing a Fund of Funds?

When selecting a Fund of Funds, NRIs should consider their investment goals, the fund's expense ratio, the fund manager's expertise, and the fund house's reputation. They should also verify SEBI registration, assess the fund's performance history, ensure compliance with their country's investment regulations, and evaluate the fund's size and liquidity. Additionally, the choice between NRE and NRO accounts for investments is crucial based on repatriation needs.

‍