There are funds and then there are funds! There are also funds of funds, which is a type of mutual fund that invests in other funds as a way of further diversifying the investment portfolio. Typical mutual funds are composed of an assortment of stocks, bonds and other possible securities. A fund of funds is a mutual fund made up of an assortment of mutual funds.
These types of funds can truly flush out and diversify your portfolio. However, they may be costlier than other mutual fund investments because with each mutual fund there are associated fees and by investing in fund of funds, investors have to pay to offset some of the additional charges.
Collective investment schemes are a way to increase the variety of holdings in a portfolio and a fund of funds can further enhance that diversification. However, because a fund of funds is a fund composed of other mutual funds, it may be possible for the same stock, bond, security or other commodity to appear multiple times in an investor’s portfolio as it may appear several times in the variety of funds being held.
Because funds of funds offer individuals who could not feasibly invest in high cost hedge funds – private equity funds get a chance to participate in those investments. Many times funds of funds are diversified into those otherwise hard to invest in sectors. Hedge funds and private equity funds are also a bit more complicated to invest in, so a fund of funds can provide the options, where otherwise the door of opportunity would be shut.
There is an assortment of pros and cons when individuals consider the choice of funds of funds for expanding the offerings in their investment portfolios. Before committing to any type of mutual fund investment, read the prospectus thoroughly to get an idea for what types of additional costs the investment package may have.