investing

fund of funds

An investment fund that holds other funds rather than individual securities, providing diversification across multiple fund managers and strategies.

Example

“The pension invested in a fund of funds that allocated capital across 20 different hedge fund managers.”

Memory Tip

FUND OF FUNDS = a fund that buys other funds. Diversification squared — but double the fees.

Why It Matters

Understanding funds of funds helps investors recognize how they can gain exposure to professional fund managers without having to research and select individual funds themselves. This matters because it allows people to diversify their portfolio across multiple investment strategies and managers with a single investment, which can reduce risk and simplify portfolio management for those without extensive investing knowledge.

Common Misconception

Many people mistakenly believe that a fund of funds automatically provides better returns than investing in individual funds, when in reality it typically charges higher fees due to the layered expense ratios from both the underlying funds and the wrapper fund itself. This extra cost can actually reduce net returns compared to carefully selected individual funds, making it less advantageous for cost-conscious investors.

In Practice

An investor might purchase a fund of funds that holds 10 different mutual funds with a total investment of 50,000 dollars. Instead of researching and buying each fund separately, they make one purchase and immediately own pieces of multiple fund managers, each managing different stock and bond strategies. However, they will pay fees at both levels: perhaps 0.5 percent from the underlying funds and 0.25 percent from the wrapper fund, totaling approximately 0.75 percent annually on their 50,000 dollar investment.

Etymology

FUND (investment vehicle) OF (consisting of) FUNDS. A FUND that invests in other FUNDS.

Common Misspellings

fund of-fundsfund of fundfunds of funds

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appreciationAn increase in the value of an asset over time.…bondA fixed-income investment where an investor loans money to a…diversificationA risk management strategy that mixes a wide variety of inve…dividendA payment made by a corporation to its shareholders, usually…expense ratioThe annual fee that mutual funds or ETFs charge investors, e…fixed incomeInvestments that provide a regular, predetermined return, su…