Fund of Funds (FOF)

What is a fund of funds?

A fund of funds, or FOF, is a pooled investment holding different funds, for example, mutual funds or hedge funds, as opposed to individual stocks, bonds and different securities.

More profound definition

The goal of the fund of funds is to accomplish broad diversification and asset allocation with different funds that are packaged into one fund. FOFs frequently draw in smaller investors who need broader investment exposure while achieving less risk than by investing straightforwardly in the securities.
FOFs, otherwise called multi-chief investments, can be costlier than different investments. The investor can wind up paying operating expenses for the underlying funds as well as the Fof's.
Beforehand, a fund of funds didn't necessarily uncover the underlying fund expenses. Notwithstanding, in January 2007, the Securities and Exchange Commission started requiring the fees be unveiled in the "obtained fund fees and expenses" line. Subsequent to accounting for the extra operating expenses, the return FOFs offer might be lower than other single investments.
The benefits of FOFs are that they give the investor professional financial management. FOFs likewise permit small investors to benefit from a diversified portfolio with negligible investment.
Additionally, FOFs managers are required to keep up with certain credentials inside the securities industry. These rules are in place to safeguard investors.

Fund of funds model

Jake has $5,000 to invest. He needs the exposure of stocks and bonds yet in addition needs to limit his risk. He invests in a mutual fund FOF. This investment comprises of several mutual funds that are packaged together and invests in different stocks and bonds.
In spite of the fact that Jake doesn't have a large sum of money, this investment is empowering him to in any case differentiate his portfolio while keeping up with lower risk. Jake likewise is benefiting from professional management.
In any case, Jake is paying higher fees than he would with a traditional mutual fund. This is on the grounds that he's being charged 1.5 percent interest for the operating expenses in the underlying fund and 1.25 percent interest in operating expenses for the fund of funds. This higher expense ratio brings down Jake's return.
Would it be a good idea for you to invest in a mutual fund or an ETF? Find out about the tradeoffs of every investment.

Features

• A fund of funds (FOF) is a pooled fund that invests in different funds.
• FOFs as a rule invests in other hedge funds or mutual funds.
• Funds of funds will generally have higher expense ratios than customary mutual funds.
• The fund of funds strategy means to accomplish broad diversification and insignificant risk.

FAQ

The amount Assets Are Invested in Funds of Funds?

As per the SEC, Total net assets in mutual funds that invest fundamentally in other mutual funds came to more than $2.54 trillion of every 2019.

Are Funds of Funds Common?

Dedicated funds of funds might be more uncommon that standalone mutual funds or ETFs. In any case, the SEC gauges that roughly 40% of all registered funds hold an investment in undoubtedly another fund.

Are Funds of Funds Regulated by the SEC?

Indeed, similar to any remaining pooled investment products, FOF are additionally administered by the SEC. Specifically, SEC Rule 12d1-4, refreshed in 2020, sets out procedures that give a steady structure to fund of funds arrangements. The SEC likewise requires FOFs to reveal their fees in a transparent way.