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FoF is an investment fund that uses an investment strategy of holding a portfolio of other investment funds rather than investing directly in shares, bonds or other securities. This type of investing is often referred to as multi-manager investment.There are different types of 'fund of funds', each investing in a different type of collective investment scheme (typically one type per FoF), eg. 'mutual fund' FoF, hedge fund FoF, private equity FoF or investment trust FoF.
Fund of Funds offer investors a unique and excellent investment proposition. These are mutual fund schemes that invest in the schemes of other mutual funds. That means; it takes the concept of mutual fund investing to another level. While mutual funds invest in stocks of various companies, FoFs invests in the schemes of their own fund house or a third party fund house. Now let us understand what makes FoFs a smart way of investing in mutual funds.
Advantages of Fund of Funds
Simplicity of the Fund of Funds: A person to achieve good results while can invest in one Fund of Funds rather than investing in several different funds. This helps the person to concentrate on only one thing and also helps the investor to take care of limited number of papers.
Cheap For the New Investors: One finds it very difficult to diversify initially as he has minimum number of accounts. For this problem the Fund of Funds become very popular for the new investors as this would help them to diversify among thousands of funds through this .
A mutual fund generally diversifies through a great number of stocks but a Fund of Funds goes through many different funds which provides the Fund of Funds double diversification.
One can also have the institutional advantages as one can make investments in various funds which are in other ways off-limit for the retail investors. One also gets the advantages of load funds and for that one does not have to pay the load.
Like a mutual fund manager specialises in selecting stocks, a FoF manager specialises in selecting the right mutual fund scheme for his fund. Hence, the decision of investing or redeeming a scheme lies with the fund manager. Hence what investors get at the end is a portfolio of some of the best mutual fund schemes in the industry
Disadvantages of Fund of Funds:
Expense Ratios: Nearly all Fund of Funds carry an expense ratio that are on the higher side. These higher ratios can bring down the amount of returns one was scheduled to get. One also has to pay some extra charges for keeping the Fund of Funds in force and this can also reduce the amount of income/ profit.