Starting out in investing can feel overwhelming. There are so many choices—stocks, bonds, mutual funds—it’s a lot to take in. Most people hear about those first. But there’s another option that’s built to make things easier and more diverse: funds of funds.
In this guide, you’ll get the basics on what these funds actually are, how they work, and why plenty of investors go for them.
A fund of funds is exactly what it sounds like—a fund that invests in other funds instead of picking individual stocks or bonds. Instead of picking individual companies yourself or having a manager do it, the manager just selects a mix of different funds to invest in.
Here’s the thing: with one investment, you’re tapping into a whole bunch of assets at once. A fund of funds can hold equity, debt, or alternative funds—it really depends on what it’s aiming for. Since these funds bundle several investments together, people like them for how simple they make things.
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Picture a basket, but this basket holds other baskets, and each of those has its own mix of investments. That’s essentially what you’re getting.
Here’s what usually happens:
A lot of investors aren’t sure which funds to pick, or don’t have the time to keep track of everything. These funds help by letting professionals handle the selection and management. There’s also the access factor. Some funds, especially hedge funds, are tough to get into because of high minimums. Investing in a hedge fund of funds gives smaller investors a way in.
Let’s explore some of the crucial benefits of these funds:
Maybe the biggest perk—your money gets spread out over a bunch of different assets, sectors, and strategies, since the fund invests in multiple funds. If one fund doesn’t do well, it doesn’t wreck your whole investment. For beginners, that’s huge.
You get to lean on pros who know what they’re doing. They pick and monitor the underlying funds, which is great if you’re not confident making those choices yourself. There’s a system and discipline to it, especially with complicated kinds of funds.
Some funds are out of reach for regular investors. With a hedge fund of funds, for example, you get exposure to hedge fund strategies without the big entry requirements. So, you can tap into more advanced investments this way.
Instead of juggling a bunch of investments, you only need to keep an eye on one. That simplicity is a big reason why a lot of long-term investors like these funds.
There are several kinds of funds of funds, each designed for different goals.
These funds invest mainly in mutual funds. You’ll see equity funds, bond funds, and balanced funds in this group. They’re pretty common with retail investors who want an easy way to diversify their portfolios.
A hedge fund of funds spreads investments across several hedge funds. Hedge funds, by the way, tend to use complex tactics—derivatives, leverage, that sort of thing. This kind of fund-of-funds usually targets experienced investors or those with a high net worth.
Some funds invest in exchange-traded funds. These are all about keeping costs down and gaining wide market exposure. They’re a modern twist on investment funds, and a lot of people use them for passive investing.
These invest across different asset classes—stocks, bonds, commodities—by holding other funds. Their main goal is to strike a balance between risk and return, which makes them a go-to choice for long-term financial planning.
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Many individuals have difficulty separating the two types of investment vehicles: a mutual fund and a fund of funds (FOF). A mutual fund will collect your capital and directly invest in securities such as equities or debt instruments. As for a fund of funds (FOF), it's different. It puts your money into a mix of other funds instead of picking investments directly. You end up with another layer—so you get more diversification, but you also pay a bit more in fees.
Mutual funds keep things simpler. Still, going with a fund of funds can open the door to a wider range of investments and make life easier if you don’t want to manage a bunch of funds on your own.
Let’s talk money. These funds aren’t cheap. You pay fees to the main fund, and then you pay again for the funds underneath it. All these layers add up.
So, when you’re comparing different investment options, don’t gloss over the costs. Some people decide the extra fees are worth it for the convenience and broader mix of investments. Others aren’t so sure.
These funds aren’t for everyone, but they do make sense for certain people:
If you want access to a bunch of mutual funds but only want to buy one thing, a fund of funds is a pretty straightforward way to do it.
Funds of funds aren’t all upside. The higher fees can pull down your overall returns. Plus, your results really depend on how the underlying funds perform. You also give up some control—someone else is choosing where the money goes.
And don’t forget, even with all that diversification, no investment is risk-free. Markets go up and down, no matter how many layers you add.
A lot of people use funds of funds as a core piece of their investment mix. They give you broad exposure and can help steady the ride. While some investors pair bonds with individual stocks or mutual funds, others consider them to be their primary long-term investment strategy. It all comes down to your comfort with risk and how hands-on you want to be.
For plenty of people, they provide a consistent rate of return with moderate risk for long-term goals, such as retirement or other large financial needs. These are ideal for the investor who prefers to invest their money and let it grow over time, rather than constantly monitoring their investments to ensure there is continued growth.
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If you want an easy way to spread your money across lots of investments, funds of funds make it simple. You get instant diversification, a pro managing things for you, and a chance to tap into all kinds of funds without juggling them yourself. Sure, you might pay a bit more in fees, but for many people, that trade-off feels worth it.
Getting the basics of how these work gives you more control and confidence when you invest.
A fund of funds doesn’t pick individual stocks or bonds. Instead, it invests your money in a bunch of other funds.
They mix things up more, so your risk gets spread out wider. But let’s be real—there’s always some market risk, no matter where you put your money.
A fund of funds is a single fund that invests in a portfolio of hedge funds. So, you’re not putting all your eggs in one basket.
Absolutely. If you’re looking for an easy way to spread out your risk and leave the heavy lifting to professionals, this is a great place to start.
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