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As Indian investors look for cost-effective and diversified ways to participate in the markets, ETFs (Exchange-Traded Funds) and FoFs (Fund of Funds) have emerged as two popular options. While both offer exposure to baskets of securities, their structure, trading mechanism, and cost implications differ significantly. Knowing how these two instruments work will help you choose the right fit for your portfolio, depending on your investment style, time horizon, and liquidity needs.
An ETF (Exchange-Traded Fund) is a tradable security listed on stock exchanges that tracks an index, commodity, bond, or a collection of assets. It offers the diversification advantages of mutual funds along with the flexibility and liquidity of individual stocks.
Trades on stock exchanges throughout the day
Tracks a benchmark index (e.g., Nifty 50, Sensex, Gold, etc.)
Prices fluctuate in real time based on supply and demand
Generally have lower expense ratios than mutual funds
You need a demat account and a trading account to buy and sell ETFs.
A Fund of Funds (FoF) is a type of mutual fund that allocates its capital by investing in other mutual fund schemes instead of directly purchasing stocks or bonds. FoFs could invest in domestic funds, international funds, or ETFs.
Investors get exposure to a diversified portfolio of other funds
Can invest in international or thematic funds not directly available to retail investors
Priced based on end-of-day NAV, not real-time
Can be held without a demat account
FoFs simplify access to complex or global strategies, especially for beginners.
Here are some popular ETFs and Funds of Funds available 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 |
ETFs vs Funds of Funds (FoFs) have distinct features that impact trading, costs, and taxation. Key differences include:
Feature |
ETF |
Fund of Funds (FoF) |
|---|---|---|
Trading Mechanism |
Traded like a stock on exchanges |
Bought/sold via AMC at NAV |
Liquidity |
High (intra-day trading possible) |
Lower (only end-of-day redemption) |
Demat Account |
Mandatory |
Not required |
Expense Ratio |
Generally lower |
Includes double-layer cost (FoF + underlying funds) |
Pricing |
Real-time |
Based on NAV |
Minimum Investment |
Price of 1 ETF unit |
As low as ₹100 in SIP |
Taxation |
Treated as equity if underlying is equity |
Depends on underlying asset class |
The cost structures of ETFs and FoFs differ, influencing investor expenses and suitability:
One expense ratio for managing the ETF
Brokerage, STT (Securities Transaction Tax), and other exchange-related charges apply
Two layers of expense – one for the FoF itself, and one for the underlying funds
No brokerage or STT for investors since FoFs are bought like mutual funds
While ETFs are cost-effective for active traders, FoFs are convenient for hands-off investors willing to bear slightly higher costs for ease of use.
Choosing between ETFs and FoFs depends on your investment goals and preferences. Consider the following scenarios:
Goal |
Better Option |
Why? |
|---|---|---|
Active trading & real-time execution |
ETF |
Offers live pricing and liquidity |
Diversified exposure without a demat account |
FoF |
Accessible via regular mutual fund route |
Investing in foreign markets |
FoF |
Most international exposure comes via FoFs |
Long-term passive investing |
ETF |
Lower costs and broad index exposure |
Convenience & simplicity |
FoF |
Managed by AMC with minimal intervention |
Tax treatment varies between ETFs and Funds of Funds (FoFs) based on their underlying asset classes:
Short-Term Capital Gains (STCG): 15% (if held <1 year)
Long-Term Capital Gains (LTCG): 10% on gains over ₹1 Lakh (if held ≥1 year)
Tax treatment is same as ETFs if the underlying fund is equity-oriented
For debt-oriented FoFs, gains are taxed as per slab rate
Always check the underlying asset class to determine the exact tax implications.
Both ETFs and Funds of Funds (FoFs) offer unique advantages and drawbacks. Here’s a quick comparison:
Pros:
Low cost
Real-time trading
Index-tracking transparency
Cons:
Requires demat account
Liquidity can be low for some ETFs
No automatic SIP option through AMCs
Pros:
Easy access to global funds
Suitable for small-ticket investing
No demat needed
Cons:
Higher cost
No intra-day pricing
Complex layering can be hard to understand for beginners
Both ETFs and FoFs are useful tools in a diversified portfolio, but they serve different purposes. If you're looking for cost efficiency, live pricing, and have a demat account, ETFs may be ideal. On the other hand, if you want simplified access to diverse or global assets, FoFs offer a user-friendly alternative—albeit at slightly higher costs. The choice depends on your investment goals, convenience preference, and risk appetite.
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.
Most ETFs don’t support direct SIPs via AMCs, but you can manually invest regularly through your broker.
Risk depends on the underlying funds. Both can be equally risky or conservative depending on their asset exposure.
FoFs are the preferred route for Indian investors to gain exposure to global equities or commodities.
Some ETFs are designed to distribute dividends, while others are growth-oriented. It depends on the scheme.
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