<p>Functionally graded materials (FGMs) are advanced engineered systems characterized by a gradual variation in composition, microstructure, and properties, enabling the integration of multiple functional requirements within a single component. This review presents a comprehensive overview of FGMs fabricated using surface melting techniques, including laser surface melting, electron beam melting, and plasma arc surface melting. The fundamental mechanisms governing gradient formation—such as solute redistribution, thermal gradients, and solidification kinetics—are discussed to highlight their role in tailoring microstructural evolution and property distribution. Recent advancements in fabrication are critically examined, with emphasis on hybrid additive manufacturing approaches, in-situ alloying, and real-time process monitoring for enhanced control of gradient profiles. Various alloy systems, including metal–metal, metal–ceramic, and ceramic–ceramic FGMs, are reviewed in relation to their processing–structure–property relationships. In addition, advanced characterization techniques used to evaluate compositional, mechanical, and thermal gradients are summarized. Key application areas in aerospace, biomedical, energy, and surface engineering sectors are also discussed. Finally, current challenges, including residual stress, interfacial stability, scalability, and lack of standardization, are identified, and future research directions are outlined to support the broader adoption of FGMs in industrial applications.</p>