A fund-of-fund (FoF) is basically a mutual fund that invests in other mutual fund schemes or exchange-traded funds (ETFs). This is another way of providing diversification across fund managers.
In India, FoFs are used to invest into ETFs, including those that invest in gold and equity indices. There are also FoFs that invest in units of international funds which in turn invest in units of global funds. Another category of FoFs, asset allocation funds, invests in equity, debt and gold funds in different proportions.
Earlier, FoFs had the disadvantage of having dual cost, but Sebi has now capped the total expense ratio at 2%. FoFs that invest in equity schemes have a disadvantage as they are taxed as debt funds. But FoFs that invest in equity ETFs are taxed as equity funds.