WHAT?

Usually a fund like Mutual fund invests in some stocks or bonds directly. But a ‘Fund Of Funds’ (FOF) is an investment strategy of holding a portfolio of some different Mutual funds or investment funds rather than investing directly in stocks, bonds or other securities. 

Therefore an FOF Scheme primarily invests in the units of another Mutual Fund scheme or some Alternate Investment Funds (AIFs). This a normal fund holds shares where as the FoF holds the units of other mutual fund or AIF schemes it has invested in. This type of investing is often referred to as multi-manager investment

GOVERNMENT'S INITIATIVE

Government of India has also created a Fund of Funds for Startups (FFS) which is also known as Fund of Funds for Startups (FFS) Scheme. The Government has established FFS with corpus of Rs. 10,000 crore, to meet the funding needs of startups. DPIIT is the monitoring agency and Small Industries Development Bank of India (SIDBI) is the operating agency for FFS. 

It provides capital available for startups at early stage, seed stage and growth stage and also plays a catalytic role in terms of facilitating raising of domestic capital, reducing dependence on foreign capital and encouraging home grown and new venture capital funds. It was approved and established in 2016.

The scheme does not directly invest in startups instead, it provides capital to SEBI-registered Alternative Investment Funds (AIFs), known as daughter funds, who in turn invest money in growing Indian startups through equity and equity-linked instruments. 

BENEFITS

1. These schemes offer the investor an opportunity to diversify risk by spreading investments across multiple funds. 
2. Experts believe fund of funds are generally better suited for smaller investors that want to gain access to a range of different asset classes or for those whose advisers do not have the expertise to make single manager recommendations.
3. It aims to provide much-needed boost to the Indian startup ecosystem and enable access to domestic capital.