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What Is A Fund Of Funds In Mutual Fund Investments?

Takeo Fay
Posted by Takeo Fay July 24, 2023

Mutual funds have often been considered a pond of opportunities where investors can dip their toes and explore various investment avenues. As a mutual fund app user, you may be well aware of the basics of mutual funds, but if you want to take your investment strategies to the next level, you’ll have to explore the depths. Funds of Funds (FoFs) are a type of investment strategy, only a few investors know about. If you classify to be one of such investors, fret no more! This blog will give you more insights into FoFs.

Fund of Funds is a strategy where a fund’s capital is used to invest in other types of mutual funds or ETFs. In other words, instead of directly investing in individual stocks or bonds, you’re investing in a collection of different funds. This method employs a diversification strategy. By investing in a portfolio of different funds, a Fund of Funds can gain exposure to various asset classes, market sectors, and investment styles, thereby providing investors with a well-rounded investment portfolio.

Super diversification is just one of the many advantages of a Fund of Funds. Below are some more points:

  1. An investor can benefit from the specialized knowledge of multiple fund managers.
  2. Since professional fund managers manage the fund, an investor saves a lot of time they would’ve otherwise spent on cherry-picking individual investment options.
  3. Diversification leads to risk mitigation, so a single fund’s poor performance won’t necessarily contribute toward overall loss.
  4. Investing in a Fund of Funds is more convenient as an investor only needs to purchase units of the fund instead of buying individual investments.
  5. The Fund of Funds presents an investor with a range of investment options, allowing the investor to choose a fund that aligns with their investment goals and nearly promises to deliver the aspired results.
  6. The fund managers can monitor and adjust the investment portfolio if needed, aligning investment decisions with market conditions.
  7. Fund of Funds eliminates barriers to a diversified investment portfolio for investors with limited capital.

However, there are some downsides that an investor needs to consider before investing in a Fund of Funds, such as:

  1. Tax Inefficiency: When there are frequent changes to the portfolio, an investor may be levied with additional taxes behind the buying or selling of an investment product.
  2. Inaccessibility: While mutual fund apps have opened the doors to a range of investment strategies, not every app for mutual fund may offer this scheme, limiting an investor from applying this strategy. Further, not all funds may be accessible under this scheme.
  3. Lack of Transparency: Some Fund of Funds may need to provide more transparency regarding the underlying holdings.

Final Thoughts:

A Fund of Funds is a great place to look at if an investor wants to minimize risk and diversify their investment portfolio. Although this investment choice results in lowered risk, it’s important to note that it’s not risk-free. Before proceeding with a Fund of Funds, an investor should research well about this method and make decisions accordingly. An investor should carefully weigh the upsides or downsides while clearly understanding their risk appetite.