Functionally graded materials (FGMs) are advanced novel engineering designs characterized by a progressive change in composition, leading to a variation in properties across the volume. These materials provide tailored properties and a superior strength-to-weight ratio, making them highly valuable for the aerospace, automotive, biomedical, and military sectors. However, due to the precise and expected grading effect across the volume, the manufacturing of FGMs has been a challenge. Over the last two decades, the use of additive manufacturing has minimized various challenges related to the fabrication of FGMs with more control over process parameters than other conventional manufacturing techniques. This study provides a state-of-art review on current state of application areas, fabrication possibilities (utilizing various additive manufacturing processes, materials, and fabrication parameters), and the challenges that currently exist in the field of FGMs. In addition, it highlights the research gaps and challenges in fabricating the FGMs by combining different materials and controlling process parameters in additive manufacturing together.