Fund of Funds

If you haven't heard of a fund of funds, you might think it is just a redundancy.  The truth is a fund of funds has some important advantages and disadvantages that you need to be aware of.

A fund of funds is exactly what it sounds like.  It is a mutual fund that invests in other mutual funds.  At first it may seem silly to you, but here are some big advantages to investing in a fund of funds:

• Double Diversification  -A mutual fund diversifies across many different stocks.  A fund of funds diversifies amongst many different funds.
  
• Simplicity  -Instead of investing in many different funds to achieve the same result, you can just invest in one fund.  This allows for much less paperwork.
  
• Cheap for Beginning Investors  -It is tough to diversify when starting out because of account minimums.  A fund of funds allows for an investor to diversify amongst hundreds or thousands of stocks in one small account.
  
• Institutional Advantages  -Funds of funds can often invest in desirable institutional funds that are off-limits for retail investors.  They also have the ability to invest in some load funds without paying the load.

I wish I could tell you that there are no disadvantages associated with a fund of funds, but I cannot.  Here are some of the disadvantages:

• Extra Fees  -Some funds of funds will charge fees at the parent level that should entice investors to create the same portfolio buying the different mutual funds themselves.
  
• Expense Ratios  -Most funds of funds carry high expense ratios which will drag down your returns over time.

Depending on your situation, investing in a fund of funds may make sense for you.  It is an attractive option for new investors.  Before investing in a fund of funds, I suggest taking a close look at the expense ratios to make sure they are not too high.  If you are interested in learning more about funds of funds, try visiting the Funds of Funds Association homepage.

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