Fund of Funds
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A fund of funds, or FOF for short, is a type of investment strategy. It involves holding a large portfolio of other investment funds, as opposed to investing directly in stocks, bonds, and other types of securities. Fund of funds investing may also be referred to as multi-manager investing. A fund of funds may be described as being “fettered.” This type of fund of funds only invests in funds managed by a single investment company. Fund of funds can also be “unfettered,” which means that it invests in funds from different external companies. There are many different types of fund of funds available. Each type invests in one type of collective investment scheme. There are fund of mutual funds, hedge fund of funds, private equity fund of funds, and investment trust fund of funds. The wide range of fund of funds may make it seemingly difficult for potential investors to choose a fund of funds to invest in, especially for those new to this sort of investment.
Fund of funds investment is beneficial as investing in a collective investment scheme is likely to increase portfolio diversity in comparison to directly investing in a small range of securities. This diversification can reduce volatility yet maintain average returns over time. However, the investor must pay a little more to cover the fund of funds fees and the fees of the underlying investment funds. The bonus is that through investing in a fund of funds, investors are often able to access investments not available to smaller individual investors. Fund of funds also benefit from the active management, as there is usually a dedicated investment manager whose job it is to select and monitor the underlying funds. Managers of fund of funds use their expert knowledge and experience to attempt to choose the best performing funds or the best funds to meet a certain investment objective. A skillful fund of funds manager can also provide greater stability if that is the goal. As with all investments, fund of funds are not guaranteed to provide regular returns. It is essential for prospective investors to review management expertise and track records when considering investing in an actively managed fund of funds. Prospective investors should also be wary against fund of funds that promise unnatural high returns.
Potential fund of funds investors can research the best ones to invest in by searching through printed or online reports of fund of funds ratings. Financial news companies may also offer annual fund rankings. Investors should look into the due diligence and safety of fund of funds and consult with a professional financial advisor prior to investing. They should read through the fund of fund’s prospectus to gain a thorough understanding of the way in which a fund of fund’s assets are valued, what types of funds it invests in, and the background of the management of the fund. Investors should understand how fees are charged and if there are any limitations towards the redemption of shares. Investors should understand the fee structure and possible tax implications of investing in the fund.
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