The Fund of Funds Investment Strategy

The fund of funds investment strategy is a popular strategy that is designed to minimize risks and increase potential gains. The idea behind a basic mutual fund is that a fund manager is going to use the money of investors to purchase shares of stocks, bonds or some other type of investment asset. With a fund of funds strategy, the fund manager is going to use the money of the group to purchase shares of other mutual funds. By doing this, the mutual fund creates a diversified portfolio of mutual fund shares from many different categories.

Lower Risk

One of the primary reasons that mutual funds will utilize this strategy is so that they can lower the potential risk for investors. This is one of the most diversified types of investments that you could get involved in. A regular mutual fund is going to hold thousands of shares of different stocks or bonds. This creates a very diversified portfolio in itself. Then when you multiply that diversification by investing in shares from many different funds, you are going to have a much more diversified portfolio. If the underlying assets that are owned by one of the mutual funds do not perform well, the other mutual funds will be there to make up the difference.

Costs

Even though this investment strategy is very low risk, it also will not provide you with large returns. You can get consistent returns, but they are not going to be that high in comparison to what you could get from investing directly in stocks or in one particular mutual fund. By diversifying your portfolio, you are also going to limit the amount of returns that are possible.

In addition to this, you are going to have to pay higher management costs. One of the big complaints about mutual funds is that you are going to have to pay for the professional management of the fund. This comes in the form of an expense ratio for the mutual fund. When you are investing in multiple mutual funds, you are going to have multiple layers of professional management. You will have to pay for the management of the underlying funds that make up the fund and then you will have to pay for the management of the fund itself. Since you are already getting modest returns, this can sometimes make the investment very undesirable.

Different Types

Even though the basic idea behind all of these is the same, there are some different types of fund of funds arrangements. One of the most common types uses mutual funds as the underlying investment. Another type is a hedge fund that invests in other hedge funds. You can also have a private equity fund that invests in other private equity funds. The last type is an investment trust that invests in other investment trusts.

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