Simplify or Strategise?

In a market oscillating between highs and corrections, diversification is no longer optional; it is essential. Indian investors now face a choice between Fund of Funds (FoFs) and Exchange-Traded Funds (ETFs)—one offering convenience and expert management, the other control and cost-efficiency. DSIJ compares both on cost, Tax, liquidity, and performance to help you choose what fits your investment style in 2025’s volatile markets [EasyDNNnews:PaidContentStart]

The year 2025 so far has proved to be a testing ground for the resilience of the disciplined Indian retail investor. Following a period of exceptional returns, post the new President coming to power in the U.S., the domestic markets, while fundamentally strong, experienced sharp volatility, leading to periods of significant market fluctuation. This environment forces investors to look beyond simple asset allocation and pursue genuine diversification—the kind that protects capital while capturing global and commodity uptrends. 

Harish Mehta, a mid-career engineer in Mumbai, has been dutifully investing through Mutual Fund SIPs (Systematic Investment Plans) for years. But the rollercoaster of 2024–25, with the Nifty 50 whipsawing, left him anxious. One day over chai, a friend mentions he is hedging his bets with a fund of funds investing in U.S. tech, while another praises low-cost Nifty index ETFs. Harish is intrigued. In India’s booming mutual fund space, with SIP inflows hitting a record ₹29,361 crore in September 2025, the choice between a Fund of Funds (FoF) and an Exchange-Traded Fund (ETF) could either supercharge or sabotage your portfolio’s diversification. Both FoFs and ETFs are SEBI-regulated products offering diversification, but they operate very differently. 

FoFs are mutual funds that invest in other funds (be it equity, debt, gold, or even ETFs) instead of buying stocks or bonds directly. This ‘fund-of-multiple-funds’ approach can bundle Nifty stocks, global shares, and even gold into one package managed by experts. ETFs, on the other hand, are more straightforward; they track an index or asset and trade on stock exchanges like shares, offering Intraday flexibility. Think of an ETF as a basket of securities (say the Nifty 50 index or gold bullion) you can buy or sell anytime during trading hours. 

As Indian investors, from a conservative Pune school teacher to a Bangalore millennial coder, rush to diversify amid market volatility, FoFs and ETFs present two distinct paths. This cover story will compare them head-to-head: costs under new SEBI rules, tax twists from the 2024 Budget, diversification power, liquidity, and performance in real markets. By the end, you will know when a hands-off FoF’s expertise shines (for example, cushioning against a falling rupee) and when an ETF’s low-cost agility wins (like riding a Nifty rally with minimal fees). Let us unravel the FoF vs ETF dilemma and help you choose the right path for your hard-earned rupees. 

Fund of Funds (FoF) – Layering for Ease and Expertise

A FoF is a mutual fund that pools investor money to invest in other mutual fund schemes or ETFs, rather than in individual stocks or bonds. Imagine a single fund that holds units of, say, a Nifty 50 Index Fund, a gold fund, and an international Equity Fund—giving you a one-stop diversified portfolio. FoFs come in several flavours under SEBI’s classifications: 

Domestic Asset Allocator FoFs: These juggle multiple asset classes within India. For example, a multi-asset FoF might allocate your money across an equity fund, a Debt Fund, and a gold ETF to balance risk. HDFC Multi-Asset FoF (formerly HDFC Asset Allocator) is one such scheme that dynamically shifts between stocks, bonds, and gold funds. 

International FoFs: These invest in overseas funds or ETFs, giving Indian investors exposure to foreign markets. For instance, there are FoFs that feed into U.S.-focused funds (like a Nasdaq 100 FoF) or Chinese equity funds. These gained popularity as the rupee slid into the mid-80s per USD in 2025, since holding some assets in dollars can hedge against rupee depreciation. 

ETF Feeder FoFs: A newer breed, these FoFs simply invest in one or more ETFs. They emerged to solve a local problem; many Indian investors lack demat accounts or find ETF trading cumbersome, but still want the low-cost diversification of ETFs. For example, Mirae Asset’s NYSE FANG+ FoF predominantly buys units of the Mirae FANG+ ETF (which holds shares of 10 U.S. tech giants). The FoF structure lets you SIP into U.S. tech via the AMC, even if the underlying ETF trades on the exchange. However, note: such FoFs can be misleadingly narrow. Mirae’s FANG+ FoF, for instance, is essentially a single-theme tech fund despite the ‘FoF’ label—it does not magically spread your money beyond that one ETF’s focus. 

Hybrid and Thematic FoFs: Some FoFs invest across a range of equity themes or sectors. A prominent example is ICICI Prudential Thematic Advantage FoF, which rotates into various sectoral funds managed by ICICI Pru AMC. This acts like a chef’s special thali—adding extra allocation to sectors (Banking, technology, pharma, etc.) that the fund managers believe will outperform, and cutting back when they will not. It is a way for ‘set-it-and-forget-it’ investors to let experts chase the next big theme. (Of course, if the experts guess wrong on themes, returns can suffer; more on that later.) 

Why Investors Choose FoFs
The appeal lies in one-stop diversification and professional oversight. You entrust the FoF manager to pick the best combination of funds. For a busy individual with no time to track markets, a FoF offers a hands-off solution; you effectively hire a fund manager to curate other fund managers. This can be especially useful in niche areas: for example, an ‘international FoF’ can navigate foreign markets and currencies that you may not understand well. FoFs also simplify life by allowing SIPs (Systematic Investment Plans) and redemptions like any normal mutual fund—no demat account or stock brokerage required. You can start with as little as `500 per month (some AMC FoFs even `100) through the AMC or platforms, which makes global or multi-asset investing accessible to a small retail investor. In short, FoFs are about convenience. They package diversification on a platter, at the cost of an extra fee layer. 

Exchange-Traded Funds (ETF) – Low-Cost Index Investing
An ETF is essentially an index mutual fund that is traded on an exchange. Instead of buying or selling units from the fund house at day’s end NAV, you trade ETF units in real time on stock exchanges (NSE/BSE) at market prices. ETFs can track broad indices (e.g., Nifty 50 ETF holds the Nifty 50 stocks in market-cap. weight), sector indices (a PSU Bank ETF holds banking PSU stocks), commodities (Gold ETFs hold physical gold on your behalf), or even international indices (some ETFs listed in India track the Nasdaq or S&P 500 via feeder mechanisms). 

The Key Features of ETFs
Intraday Flexibility: You can buy or sell anytime during market hours, taking advantage of price movements. If Nifty jumps in the morning and you want to lock in gains by afternoon, an ETF allows that; a traditional index would only let you sell at end-of-day NAV. For active investors or market timers, this is a boon. ETFs essentially combine mutual funds’ diversification with stocks’ tradability. 

Low Expense Ratios: Most ETFs in India are passively managed – the fund manager isn’t trying to beat the index, just replicate it. This passive approach is far cheaper. ETF expense ratios are often under 0.1 per cent annually (some as low as 0.05 per cent), versus actively managed funds’ ~1-2 per cent. For instance, UTI Nifty 50 ETF, one of the largest in India, charges about 0.05 per cent and manages a whopping ₹63,831.92 crore in assets. The category giant SBI Nifty 50 ETF, fueled by EPFO money, has become a `2 lakh crore behemoth (yes, `202,000 crore AUM) with a tiny 0.04 per cent fee. These ultra-low costs mean more of your returns stay in your pocket. Add to this trading cost and commission, which is less than one per cent. 

No Minimum Investment (but needs Demat): You can buy even 1 unit of an ETF, which might cost as low as a few hundred rupees (depending on the NAV). However, because ETFs trade like shares, you do need a demat account and a trading account to invest. This is a barrier for some first-time investors. Also, you cannot do a formal SIP from the AMC’s side – you would manually purchase units periodically, or use your broker’s features to simulate SIPs. There is no `500 per month auto-debit SIP in an ETF as there is with mutual funds. 

Varieties and Growth: As of now, Indian markets host ETFs across equity market caps (Large-Cap., Mid-Cap. indices), sectors (CPSE ETF, Bank ETF, etc.), themes (smart beta like lowvolatility or momentum ETFs), fixed income (Government bond ETFs, Bharat Bond series), commodities (Gold ETF, recently Silver ETF), and international shares (via feeder ETFs). The passive investing trend is on fire – the mutual fund industry’s passive AUM (ETFs) has grown multifold since 2019, now comprising about 12 per cent of the total `75 lakh crore industry AUM. This indicates rising popularity and trust in low-cost ETF investing. 

Why Investors Choose ETFs
Cost and control: ETFs are preferred by cost-sensitive investors and those comfortable using demat accounts, who want to directly manage their exposure. You avoid the ‘double layer’ fees of FoFs and can build a portfolio of various ETFs (equity, debt, gold) on your own to suit your needs. ETFs also allow quick entry/exit, e.g., a savvy investor can shift from a Nifty ETF to a Gold ETF in seconds during turbulent times. The flipside: you need some know-how to trade, and must watch for liquidity and price-NAV deviations (an illiquid ETF might trade at a slight premium/discount to its actual NAV). By and large, major ETFs like Nifty, Bank Nifty, etc., have market makers ensuring liquidity. But smaller niche ETFs can have wide bid-ask spreads. 

To sum up the basics: a FoF gives you simplicity (one fund, many ingredients, managed by someone else) and accessibility (no demat, SIPs possible), whereas an ETF gives you cost efficiency and trading flexibility (but you manage it directly). Both are legal, SEBI-regulated instruments; neither is inherently ‘risk-free’ or ‘better’ – it depends on how you use them. Now, let us pit them head-to-head on key factors that matter for your diversified investing. 

Head-to-Head Comparison
When deciding between a FoF and an ETF for diversification, consider the following factors in the Indian context: 

Costs and Fees: This is often the deal-breaker. FoFs typically have higher expense ratios due to two layers of fees – the FoF’s own management fee plus the fees of underlying funds. It is not uncommon for FoFs to charge total expenses around 0.5 per cent to 1.5 per cent annually (some international or themed FoFs even more), whereas broad index ETFs charge under 0.1 per cent. For example, an international FoF might have 1 per cent expense ratio, on top of the 1–2 per cent fees of the global funds it holds – so you indirectly pay about 2–3 per cent. In contrast, a Nifty 50 ETF might charge 0.05 per cent. Over long periods, this fee drag can significantly impact returns. Trading costs also differ: FoFs do not require trading – you buy/sell at NAV from the AMC (perhaps an exit load if you redeem too early). ETFs, however, incur brokerage like shares, and STT (Securities Transaction Tax) on sell transactions (0.001 per cent). If you are doing small, frequent trades, those brokerage fees can add up (though discount brokers make it negligible these days). Broadly, for cost minimisation, ETFs win – provided you have the means to invest in them directly. FoFs essentially make you pay a bit extra for convenience and expertise. 

Comparing FoFs and ETFs 

Diversification Power
Both FoFs and ETFs offer diversification but in different ways. FoFs can provide multi-level diversification, sometimes across asset classes, geographies, and strategies in one go. You can find FoFs that combine equity, debt, and gold (one fund, instant asset allocation), or ones that include international exposure (hedging against domestic downturns). ETFs, on the other hand, typically focus on a defined index or theme, which might be narrower. A single ETF gives you whatever that index holds – if it is Nifty 50, you get 50 large shares (good broad equity diversification, but no smallcaps, no debt, etc.). To get multiasset exposure via ETFs, you would need to buy a set of ETFs (e.g., one equity ETF + one debt ETF + one gold ETF). That is perfectly doable – many DIY investors do exactly this – but it is a bit more hands-on. Also note, some ETFs are very niche (e.g., a PSU Bank ETF only holds banking PSUs – all highly correlated shares). A thematic FoF could potentially be more diversified than a thematic ETF if it spreads across multiple themes. However, it is also possible for a FoF to be less diversified: for instance, if it invests in just one underlying fund or ETF. Always look ‘under the hood’ – FoF names can be deceptive. A ‘Global FoF’ might only invest in one U.S. fund; an ‘ETF FoF’ might put everything into one sector ETF. In summary, FoFs can cast a wider net by design, whereas each ETF is a focused basket – you choose how many baskets to hold. 

Liquidity and Accessibility
Here the differences are stark. FoF liquidity comes from the mutual fund itself – you put in a request to redeem, and the AMC will pay you out at end-of-day NAV (usually within T+2 days). You do not worry about finding a buyer; the fund always honours redemption (barring extreme scenarios). However, you cannot cash out mid-day at a desired price – it is always the closing NAV. ETF liquidity is market-driven: you need another buyer/seller on the exchange. Popular ETFs like SBI or Nippon Nifty 50 ETFs have high trading volumes and tight spreads, so liquidity is excellent and you can transact near real NAV. But smaller ETFs can be illiquid – you might have to accept a few paisa or rupee discount to sell immediately. Large institutions use the creation/redemption mechanism to arbitrage any big price-NAV gaps, so for major ETFs liquidity is usually fine. Accessibility-wise, FoFs are easier for the average investor – no demat account needed, just use any MF platform or agent. In October 2025, India had over 9.25 crore SIP accounts running – largely because mutual funds (including FoFs) allow such convenient investing. ETFs, in contrast, require demat and comfort with trading apps. If you live in a small town with limited fintech access, FoFs via a local MF distributor might be far more accessible than figuring out how to buy an ETF. Also, FoFs allow fractional units (you invest ₹1,000, you get units up to 3 decimal places), whereas ETFs trade per unit (you can’t buy half a unit). The minimum investment for most FoFs is just `500 (for a monthly SIP), whereas the minimum for an ETF is the market price of 1 unit (which could be ₹10 or ₹11,000 depending on the ETF). For example, ADITYA BIRLA SUN LIFE NIFTY PSE ETF, is currently trading at ₹10.21 while, LICMFGOLD is currently trading at ₹11071.85. That said, with brokers now offering SIP features for ETFs and demat accounts becoming common even in tier-2 cities, the accessibility gap is closing. 

Performance and Risk
Both vehicles ultimately derive performance from their underlying assets. An ETF’s performance will mirror its index minus a tiny fee and tracking error. A FoF’s performance will be the weighted sum of its underlying funds’ performance minus a higher fee. One key difference: FoFs are often actively managed at the allocation level, whereas most ETFs are passive. So, a FoF manager might decide to overweight tech funds or move 10 per cent from equity to gold based on market outlook, adding an element of timing or tactical calls. If they get it right, the FoF could outperform a static index; if wrong, it could underperform. For example, consider an Indian context: ICICI Prudential Bharat 22 FOF (which invests in the Bharat 22 ETF of PSU stocks) had stellar returns in recent years as PSU stocks surged—it delivered about 35.7 per cent annualised returns over the last 5 years (thanks to a post-2020 rally in public sector companies). A plain Nifty 50 ETF in the same period gave roughly 18 per cent annualised (130 per cent cumulative over 5 years). The catch? The PSU-heavy FoF also saw more volatility—in some 12-month periods it fell behind the Nifty. In fact, in the 1 year trailing October 2025, Bharat 22 FOF had a slight negative return of 2.02 per cent, whereas Nifty was modestly positive. The lesson: FoFs that focus on a theme can be more volatile than a broad-market ETF, but they might also deliver a bigger upside if that theme plays out. On the other hand, a FoF that is inherently diversified (like a balanced asset allocator FoF) might exhibit lower volatility than a pure equity ETF, since it has debt and gold to cushion equity swings. Risk also comes from structure: ETFs have market risk plus intraday price risk (if you sell at an odd hour, you might get a price far from true NAV if volumes are thin). FoFs have market risk plus fund selection risk (the risk that the chosen underlying funds underperform). In practice, both FoFs and ETFs can be low-risk or high-risk depending on what they contain. You should evaluate the underlying portfolio: a global FoF containing only FAANG stocks is as risky as a tech ETF; a Nifty index ETF is as stable (or volatile) as the Indian largecap. market itself. One metric to check is the standard deviation or volatility of returns: many fund factsheets report this. A broad equity ETF might show a standard deviation of around 12–15 per cent, whereas a thematic FoF could be 15–20 per cent. Also consider tracking error for ETFs (a measure of how closely it follows the index—usually very low for large ETFs) versus ‘alpha’ for FoFs (are they actually adding value through their fund picks or tactical moves?). Often, FoFs deliver ‘reasonable but not top-notch returns’ due to their diversified approach—they aim to avoid big mistakes rather than shoot out the lights. 

Tax Efficiency
Thanks to recent tax law changes, this factor has tilted. Historically, FoFs (unless they invested 90 per cent in domestic equity ETFs) were treated as debt funds for tax, meaning higher capital gains tax and no special equity exemption. Meanwhile, equity ETFs enjoyed equity-fund taxation. As of FY 2025-26, under the updated rules post Budget 2024, equityoriented investments (including equity ETFs, and FoFs that invest predominantly in equity ETFs) are taxed at 12.5 per cent long-term capital gains (LTCG) if held over 12 months, beyond a ₹1.25 lakh annual gains exemption. Short-term gains (under 12 months) on equity are taxed at 20 per cent. So, an ETF tracking Nifty or a FoF investing in Nifty ETF qualifies for this equity treatment (because STT is paid when you sell an ETF, or because the FoF holds an ETF that pays STT). However, many FoFs do not meet that 90 per cent-in-equityETF criterion—for example, FoFs investing in active funds or international funds are considered non-equity. Since April 1, 2023, the tax landscape for mutual-fund investors in India has shifted significantly. Units of debt-oriented funds—which broadly include international funds, gold funds and FoFs that invest in active funds—acquired on or after that date no longer enjoy the 20 per cent tax rate with indexation for long-term capital gains. Instead, all gains are now taxed at your income tax slab rate, regardless of how long you hold them. Units bought before April 1, 2023 still qualify for the old regime (20 per cent with indexation if held beyond 36 months). At the same time, equity ETFs and equity-oriented mutual funds saw changes in July 2024: for sales made on or after July 23, 2024, long-term gains (after one year) are taxed at 12.5 per cent above a ₹1.25 lakh gain per fiscal year, and short-term gains are taxed at 20 per cent. For sales prior to that date, the previous 10 per cent (LTCG above ₹1 lakh) and 15 per cent (STCG) rules apply. In short: for long-term investors who hold units of equity ETFs or equity-oriented FoFs under the right conditions, the tax-efficiency remains favourable—but for funds structured more like debt (or investing actively/passively outside the equity domain), the tax burden has risen sharply. 

As the table shows, ETFs score on cost, control, and tax efficiency, while FoFs win on simplicity and “invest and chill” convenience. 

The Path Forward: When to Choose What
Still unsure which path fits you? Here is a practical guide to help make the decision, especially suited to Indian investors navigating 2025’s market landscape: 

Choose FoFs - If you prefer simplicity and guidance. FoFs make sense for investors who want diversification but lack the time or desire to actively manage multiple funds or a demat account. If you are risk-averse, SIP-focused, and happy with steady (if unspectacular) returns, a FoF could be your vehicle. For example, a conservative salaried professional in Mumbai nearing retirement might opt for a balanced FoF that autorebalances between equity and debt, ensuring he does not have to constantly check the market. FoFs are also ideal if you want access to complex themes with an expert’s touch. Want international exposure but not sure which global fund is best? An International FoF can pick and mix for you. Concerned about rupee depreciation? A FoF that includes a rupee-hedged global fund or gold can protect you. Also consider FoFs for goal-based investing: e.g., a child education FoF that invests in a mix of domestic equity, overseas equity, and debt funds – giving a one-shot solution for a long-term goal. With FoFs, you are one step removed from daily market noise (since you are not trading daily), which can help you stay disciplined. If you know you are the type to panic-sell in a crash, a FoF might buffer you from making rash moves (the fund manager might handle the rebalancing calmly). 

Choose ETFs - If you are cost-conscious, financially literate, and like to be in the driver’s seat. ETFs are fantastic for those who want to optimise every rupee of return by avoiding high fees. Young investors with long horizons (say a growth-oriented millennial in Bengaluru’s tech scene) can accumulate sizable wealth by saving that 1-1.5 per cent annually in fees – compounding in your favour instead of to an AMC’s revenue. If you already have a demat account (perhaps you dabble in stocks or already buy direct equities), adding ETFs is a no-brainer to diversify. Demat-savvy investors, DIY enthusiasts, and those who enjoy tracking markets often lean towards ETFs because they offer flexibility and instant execution. 

For instance, an HNI in Delhi who is tax-conscious might use ETFs to tactically harvest gains or losses for tax purposes – something that is harder to do with FoFs due to less control on timing. If you appreciate transparency, ETFs lay their portfolio out daily and you can see prices live – whereas a FoF reveals holdings monthly and you trust the manager in between. 

Choose ETFs if you like the idea of ‘passive investing’ – letting markets do their thing – and you just want to ride along at minimal cost. And importantly, only choose ETFs if you are comfortable managing a handful of funds yourself (or with an advisor). Remember, an ETF does not rebalance for you – you are the fund manager in charge of your asset allocation. Many find this empowering; some find it intimidating. 

Hybrids and New Trends
It is not necessarily an either-or. In fact, a blended approach can work wonders. You might use a FoF for one part of your portfolio and ETFs for another. For example, suppose you have ₹10 lakh to invest. You could put ₹5 lakh in a multi-asset FoF (letting it handle the equity-debt-gold splits) and ₹5 lakh into a couple of equity ETFs that you have conviction in (say a Nifty 50 and a Midcap 150 ETF). 

This way, you get the best of both: the FoF provides stability and expert management on one side, the ETFs give you low-cost high-growth potential on the other. SEBI has been supportive of innovation in this space; ETF-based FoFs are essentially such hybrids packaged neatly (we already discussed those). When deciding, know thyself: If you want zero-maintenance investing, lean FoF; if you love tinkering and optimising, lean ETF. Some investors even start with FoFs as a learning step – e.g., use an index FoF for a year to get a feel, then graduate to buying the ETF directly once confident. Just keep an eye on industry trends and regulations: SEBI’s continual push for transparency and cost reduction means FoFs will hopefully get cheaper, and ETFs more accessible. Already in 2025, SEBI has cut total expense ratio (TER) limits for mutual funds to benefit investors – which could narrow the fee gap between FoFs and direct funds in the future. 

Conclusion
Whether you choose a Fund of Funds or an ETF (or a mix of both), the ultimate goal is to create a well-diversified, resilient portfolio that suits your financial goals and personality. India’s investment ecosystem offers room for both paths. As we have seen, FoFs provide an easy on-ramp to diversification – a professional guiding hand to navigate the ever-changing market terrain. ETFs put you firmly in the cockpit – empowering you with low-cost tools to craft your own journey. 

Both can coexist beautifully: you might rely on FoFs during the early learning phase or for certain complex exposures, and harness ETFs once you gain confidence in direct investing. 

In the spirit of India’s favourite investing festival, treat your portfolio like a thali at Diwali – you want a bit of everything good, balanced to your taste. FoFs and ETFs are two serving platters. Pick the mix that leaves you feeling satiated, not spicy indigestion. And remember, the choice is not irreversible; you can rebalance and recalibrate as you learn. 

The worst thing would be to stay out of the markets entirely due to confusion; both FoFs and ETFs ultimately funnel into equities, bonds, gold etc., which historically have beaten inflation and built wealth.

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