What is a fund of funds (FOF)?

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.

Some features of FOFs are:

• Diversification
• appropriate allocation of assets
• Suitable for smaller investors who want exposure but with less amount of risk.
• Access to more funds in a small amount than the investor himself could have invested in
• High amount of expenses involved- management of funds costs and additional cost of underlying assets.

A fund of funds (FOF) is an investment strategy in which a fund invests in other types of funds. It is also referred to as a multi manager investment. In this strategy, instead of investing directly in bonds, stocks and other types of securities, investment is done in a portfolio that contains different underlying assets

• FOF aim is to achieve broad diversification of the fund and at the same time appropriate asset allocation with investments in a variety of fund categories that are all wrapped into one fund.
• These funds attracts small investors who want to get better exposure with fewer risks than as compared to directly investing in securities
• these funds invests in portfolios containing assets and funds managed by one investment company

Advantages of fund of funds are:

• Professional financial management services- Fund is managed by experienced fund managers. These managers are selected by formal due diligence procedure, thus ensuring proper management of these funds
• Allows investors limited capital to tap into diversified portfolios with different underlying assets. These assets are otherwise difficult to access through individual investment
• Provide diversification and less exposure to market volatility

Note:

• Investment fees is higher than as compared to traditional funds- This may effect the net returns of the portfolio

Thus, yes these funds are good investments but they have high fees. At the time due diligence is required by choosing these funds. The past performance of the fund and management should be considered