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An overview of the key differences between Exchange Traded Funds and Funds of Funds in India, focusing on structure, trading and pricing mechanisms, cost layers, and tax treatment linked to the underlying asset class.
An Exchange-Traded Fund, often discussed under ‘what is an ETF or exchange traded fund explained’, is a market-listed investment instrument that mirrors the performance of a defined index, commodity, bond basket, or asset group. In the context of ETF investment in India, these instruments combine features of mutual funds with stock-like trading on exchanges.
Trades on Stock Exchanges: ETF units are bought and sold on recognised exchanges during market hours, similar to equity shares.
Tracks a Benchmark Index or Asset: ETFs are structured to replicate benchmarks such as the Nifty 50, Sensex, gold prices, or sector-specific indices.
Real-Time Pricing: ETF prices change throughout the trading session based on demand, supply, and the value of underlying assets.
Lower Expense Ratios: ETFs generally have lower ongoing management costs compared to actively managed mutual funds due to their passive structure.
Account Requirements: Buying or selling ETFs requires an active demat account and trading account, as transactions occur through the exchange.
Overall, ETFs function as exchange-traded instruments that provide diversified exposure with intraday tradability, reflecting how underlying assets are priced in the market.
A Fund of Funds (FOF) is designed to provide exposure to multiple investment strategies through a single mutual fund structure, by allocating capital across other mutual fund schemes rather than investing directly in individual securities.
In practice, a FOF pools investor money and deploys it into a selection of underlying funds, which may include domestic equity funds, debt funds, international funds, or exchange-traded funds (ETFs), depending on the scheme’s mandate.
Diversified Exposure:
Invests across multiple mutual fund schemes, spreading exposure across fund managers, asset classes, or geographies.
Access to International or Thematic Funds:
Enables participation in overseas markets or specialised investment themes that may not be directly accessible to retail investors.
Pricing Mechanism:
Transactions are executed at the end-of-day Net Asset Value (NAV), rather than at real-time market prices.
Account Requirements:
Units can be purchased and held without a demat or trading account, as FOFs follow the standard mutual fund route.
Overall, FOFs offer a structured way to access diversified fund strategies within a single product framework, combining operational simplicity with exposure to a broader investment universe.
Examples help clarify the practical distinction in the ETF vs FOF comparison by showing how each structure is implemented in the Indian market.
| Product Type | Example | Underlying Asset |
|---|---|---|
ETF |
Nippon India Nifty 50 ETF |
Nifty 50 index |
ETF |
SBI Gold ETF |
Physical gold |
FOF |
ICICI Prudential US Bluechip Equity FOF |
Invests in US equity funds |
FOF |
HDFC Gold FOF |
Invests in HDFC Gold ETF |
These examples illustrate what is FOF and how ETFs and FOFs differ in terms of direct asset exposure versus fund-based exposure.
ETFs and Funds of Funds (FOFs) differ in structure, execution, and cost layers. Understanding ETF vs FOF helps clarify how each operates within the Indian investment ecosystem.
| Feature | ETF | Fund of Funds (FOF) |
|---|---|---|
Trading Mechanism |
Traded on stock exchanges |
Bought or redeemed via AMC at NAV |
Liquidity |
Intraday liquidity |
End-of-day liquidity |
Demat Account |
Required |
Not required |
Expense Ratio |
Single expense ratio |
Two-layer expense structure |
Pricing |
Real-time market price |
Based on NAV |
Minimum Investment |
Price of one ETF unit |
Scheme-defined minimums |
Taxation |
Based on underlying asset |
Based on underlying asset |
This table highlights the difference between ETF and FOF without implying preference or suitability.
ETFs and FOFs follow different cost frameworks based on how they are structured.
Single expense ratio charged by the ETF
Brokerage, STT, and exchange-related charges apply during transactions
Expense ratio at the FOF level
Expense ratios of underlying funds are embedded
No brokerage or STT at the investor level
These differences explain how costs arise in FOF vs ETF structures without drawing conclusions about suitability.
ETFs and Funds of Funds (FOFs) appear in different market contexts based on how they are structured, accessed, and transacted. The table below outlines common situations in which each instrument is typically utilised, without implying preference or suitability.
| Use Case | ETF | Fund of Funds (FOF) |
|---|---|---|
Exchange-based trading activity |
ETFs are traded on stock exchanges and allow order placement during market hours |
FOFs are transacted through mutual fund platforms at end-of-day NAV |
Portfolio exposure without a demat account |
Not applicable, as ETFs require demat and trading accounts |
FOFs can be held without a demat account |
Access to overseas or thematic strategies |
Limited to ETFs listed on Indian exchanges |
Often used to access international or thematic funds through domestic structures |
Passive market exposure |
Commonly used to track indices through exchange-listed instruments |
Exposure achieved indirectly through underlying index or active funds |
Operational simplicity |
Requires interaction with exchange and broker systems |
Transactions handled through fund houses and registrars |
Understanding how ETFs and Funds of Funds (FOFs) are taxed is relevant because their tax treatment is linked to the nature of the underlying assets rather than the investment wrapper itself. This can result in different tax outcomes even when two products appear similar in exposure.
Short-Term Capital Gains (STCG): Taxed at 15% if units are held for less than 12 months
Long-Term Capital Gains (LTCG): Taxed at 10% on gains exceeding ₹1 lakh if units are held for 12 months or more
If the FOF invests predominantly in equity-oriented funds, capital gains taxation follows equity mutual fund rules
If the FOF invests in debt-oriented or international funds, gains are taxed according to the applicable debt mutual fund taxation rules, which currently involve slab-rate taxation irrespective of holding period
Because FOFs derive their tax treatment from the composition of their underlying investments, asset allocation determines the applicable tax structure.
The ETF vs FOF comparison can also be viewed through structural characteristics.
Characteristics
Exchange-traded with real-time pricing
Typically lower expense ratios
Limitations
Requires a demat account
Liquidity varies across ETFs
SIP functionality is not AMC-based
Characteristics
Provides exposure through underlying funds
Available without a demat account
Limitations
Additional expense layering
NAV-based pricing without intraday execution
Both ETFs and Funds of Funds represent structured ways to access diversified market exposure. The distinction between ETF vs FOF lies in how each instrument is traded, priced, and costed. Understanding what is an FOF and how it differs from an ETF provides clarity on market structure, execution mechanics, and expense layering without implying preference or outcome.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
ETFs do not support SIPs through mutual fund platforms, but investors can invest regularly by placing periodic buy orders through a trading account.
The risk level of both ETFs and FOFs depends on the underlying assets they invest in rather than the structure itself.
International market exposure for Indian investors is commonly available through Funds of Funds (FOFs) that invest in overseas mutual funds or ETFs.
Some ETFs distribute income, while others follow a growth structure. This depends on the ETF’s stated mandate and underlying assets.
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