Fund of Funds & International Funds
A fund of funds invests in units of other mutual fund schemes, and international funds invest in securities listed abroad. This lesson covers the two layers of cost, currency risk, the limits on overseas investment and how a gold fund of funds works.
What a fund of funds is
A fund of funds (FoF) invests in units of other mutual fund schemes rather than directly in shares or bonds. A fund house may run more than one FoF if each has different underlying funds. A feeder fund is an FoF that invests in a single overseas fund.
The investor bears two layers of cost: the FoF's own expenses and, through it, the expenses of the underlying schemes. The SEBI (Mutual Funds) Regulations, 2026 set expense caps for an FoF according to what it invests in: 0.90% for one investing in liquid, index or ETF schemes, 2.10% for one with 65% or more in equity schemes, and 1.85% for others.
International funds and currency risk
International funds invest in securities listed abroad. Their value in rupees moves with two things: the foreign market and the exchange rate.
If the foreign currency becomes more expensive in rupees, that adds to the return in rupees; if it becomes cheaper, that subtracts from it. The two effects compound rather than simply add, and the rupee can move in either direction.
Limits on overseas investment
Mutual funds' overseas investments are capped. For overseas securities the limit is USD 1 billion per fund house within USD 7 billion for the industry. Overseas ETFs have a separate limit: USD 300 million per fund house within USD 1 billion for the industry.
When its headroom is used up, a scheme may pause fresh subscriptions, so whether an international scheme accepts new money varies from time to time. Schemes with 80% or more overseas also run on a slower timetable: NAV is disclosed by 10 AM on the next business day, and redemption proceeds are paid within 5 working days instead of 3.
Gold fund of funds
A gold FoF invests in gold ETFs. It is bought and redeemed with the fund house at NAV, like any other mutual fund scheme, so no demat account is needed. Gold ETFs themselves trade on a stock exchange and need one.
Neither guarantees a price or a return. The price of gold can fall as well as rise.
How the gains are taxed
An international equity fund or overseas FoF is not an equity-oriented fund for tax, because that test needs at least 65% in listed domestic equity shares. As generally understood, its gains are long-term when units are held more than 24 months and are then taxed at 12.5% without indexation; otherwise they are taxed at the investor's slab rate (rates as of October 2026).
Rules at a glance
Two layers of cost (illustrative, assumed figures)
Assume an FoF's own expenses are 0.30% a year and the scheme it invests in has expenses of 0.50% a year. The investor bears about 0.30% + 0.50% = 0.80% a year in all.
The first layer is charged in the FoF itself. The second is charged inside the underlying scheme and reaches the investor through that scheme's NAV, which is what the FoF holds.
Market return and currency movement compound (illustrative)
- Assume an overseas share index rises 15% in US dollar terms over a period in which the US dollar becomes 5% more expensive in rupees.
- Return in rupees = (1 + 0.15) × (1 + 0.05) − 1 = 1.2075 − 1 = 20.75%.
- Simply adding 15% and 5% gives 20%, which leaves out 15% × 5% = 0.75%.
- Now assume instead that the dollar becomes 5% cheaper in rupees: (1 + 0.15) × (1 − 0.05) − 1 = 1.0925 − 1 = 9.25%.
Result. The same 15% rise abroad is 20.75% in rupees in the first case and 9.25% in the second. Currency movement works both ways, and neither direction can be assumed in advance.
Key points
- A fund of funds invests in units of other mutual fund schemes, so the investor bears two layers of cost.
- International funds carry currency risk: the exchange rate can add to or subtract from the return in rupees.
- Overseas securities limit: USD 1 billion per fund house within USD 7 billion for the industry.
- Overseas ETF limit: USD 300 million per fund house within USD 1 billion for the industry.
- A scheme may pause fresh subscriptions when its overseas headroom is used up.
- A gold FoF invests in gold ETFs and needs no demat account; the price of gold can fall as well as rise.
Common misunderstandings
- Market return and currency movement are not simply added: they compound, so 15% and 5% give 20.75%, not 20%.
- An international scheme is not always open to new money: it may pause fresh subscriptions when its overseas headroom is used up.
- An international equity FoF is not taxed as an equity-oriented fund: that test needs 65% in listed domestic equity shares.
Questions people ask
What is a feeder fund?
A fund of funds that invests in a single overseas fund.
What is the industry-wide limit on mutual funds' investment in overseas securities?
USD 7 billion, with USD 1 billion for each fund house. Overseas ETFs have a separate limit of USD 1 billion for the industry and USD 300 million per fund house.
Which cost feature is specific to a fund of funds?
The investor bears the FoF's own expenses and, indirectly, the expenses of the underlying schemes. No mutual fund scheme charges an entry load.
What this lesson relies on
- SEBI Master Circular for Mutual Funds (20 March 2026) — Chapter 3 (categorisation); overseas investment limits; NAV disclosure and redemption timelines
- SEBI (Mutual Funds) Regulations, 2026 — Regulations 66 and 67 (expenses)
- Income-tax Act, 2025 — capital gains on mutual fund units; rates as of October 2026
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.