A fund of funds is an investment strategy that involves holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. This approach allows investors to achieve broad diversification across various asset classes, geographic regions and investment styles by investing in a collection of mutual funds, exchange-traded funds (ETFs) or hedge funds managed by different fund managers. By pooling investments into multiple underlying funds, a fund of funds aims to reduce the risk associated with investing in a single strategy while capitalising on the expertise of various fund managers.
Funds of funds to offer individual and small investors access to diversified, professionally managed portfolios that might otherwise be out of reach due to high minimum investment requirements or the complexity of managing a diversified portfolio themselves. Funds of funds can target specific investment themes, such as global equity, fixed income or alternative investments, providing investors with a convenient way to gain exposure to a wide range of assets and investment strategies. Additionally, funds of funds provide an extra layer of oversight, as the manager evaluates and selects the underlying funds based on their performance, management quality, and alignment with the funds of funds investment objectives.
However, investing in a fund of funds also involves certain considerations, such as higher fees. Since investors are essentially investing in multiple funds, each with its own set of management fees, the overall expense ratio for a fund of funds can be higher than investing directly in a single fund. This layered fee structure can impact the net returns investors receive. Despite this, for many investors, the benefits of diversification, professional management and the convenience of accessing a broad array of investments through a single platform make a fund of funds an attractive investment option.
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