What is Fund of Funds?

What is Fund of Funds?


By Tanggram Mar 25, 2020


Fund of Funds (FoF) is a managed investment scheme that invests in other schemes or managed funds. In this, the fund manager holds a portfolio of other mutual funds instead of directly investing in equities or bonds.

For example, Tanggram Investment Fund is a mutual fund scheme that invests in mutual funds such as La Trobe Financial and Trilogy Fund.

Pros of investing in Fund of Funds

a. Instant diversification

Since your fund is comprised of more than just one type of security or portfolio, you get access to instant diversification. Your investment is spread across different investment managers.

b. Lower risk

Mutual funds — one of the main types of funds that FOFs invest in — don’t carry as much risk as other types of investments, like stocks.

c. Professional management

A fund of funds invests in professionally managed funds with experienced investment managers.

Cons of investing in Fund of Funds

a. Additional layer of fees

With the professional management services you’ll receive, you can also expect to pay higher fees and expense ratios compared to other mutual funds.

b. Risk of overlap in holdings

There is higher risk of owning the same stocks and securities through different funds, which reduces the potential for diversification.

c. Difficulty in finding qualified managers or funds

Not all fund managers operate FOFs the same way. It might be more difficult to find a qualified professional to handle those investments for you.

KEY Points

• A fund of funds (FOF) is a pooled fund that invests in other funds.

• FOFs usually invests in other hedge funds or mutual funds.

• The fund of funds (FOF) strategy aims to achieve broad diversification and lower risk.

• Funds of funds tend to have higher expense ratios than regular mutual funds.

Who should invest in Fund of Funds?

The Fund of Funds is a good bet for small investors. The diversification of funds helps to reduce the risk.

It also allows investors who possess only limited wealth to partake in diversified underlying assets that would otherwise be hard for such investors to access individually.

It is also a great medium of investment for an investor with small amounts of funds available for investment each month.

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