I recently came across some mutual funds that are fund of funds - i want to understand if it really makes sense to invest in these funds? Does it help in diversification? What is the purpose of these funds?Asked
Like the name suggests, a Fund of Funds (FOF) is a mutual fund that invests in other mutual funds. Also referred to as a multi manager investment, a FOF invests in a portfolio that has different underlying assets instead of investing directly in stocks, bonds and other securities.
Advantages of fund of funds are:
· Allows to invest in a large number of hedge funds
· May give access to funds that are otherwise closed to new investors
· High diversification
· Managers have expertise
Disadvantages of fund of funds are:
· Additional layer of fees
· Disparate returns
· Chosen on the basis of past performance
Fund of Funds (FOF) is a fund that invests in mutual funds in order to get proper asset allocation and diversification.
Small investors looking to get better exposure with low risk prefer to invest in Fund of Funds. He exposure of the asset involved here is much better since an investor gets exposure to a wide variety of stocks from different sectors in which the mutual funds in this fund has invested.
Following things must be kept in mind while investing in FOF:
· Costs involved in underlying Fund of funds is high
· Preferable for an investor looking to invest in 4 different funds but might not have the capital to invest in each of them separately
· High diversification
· Greater exposure at low costs
Investments in case of FOFs are lower compared to mutual funds because of management fees higher as compared to mutual funds.
Now investors looking to get the above mentioned benefits can definetely look for investing in Fund of Funds.
Following funds can be invested in:
Fund of funds (FoF) is a fund that invests in other mutual funds. It provides to its investors the benefit of low cost and diversification.
In this, a manager decides to invest the funds in a portfolio of mutual funds, each managed by other mutual fund managers. It is suitable for those investors who want to gain more exposure into different mutual fund schemes while investing only a small amount of money. For example, an investor might want to invest in 4 different funds but might not have the capital to invest in each of them separately. This problem can be solved via investment in Fund of funds, where small investment provides an exposure to multiple mutual funds.
Investors must keep in mind the costs involved in underlying Fund of funds, in terms of the management fees, and other costs.
Greater exposure at low costs
Can invest in small amounts
Benefit of diversification