Fund of Funds is an investment strategy in which a fund invests in other mutual funds. This type of investment is called multi-manager investment. It invests in a portfolio that has different underlying assets instead of investing directly in stocks, bonds, and other securities. The fund of funds is also known as “fettered” which means it invests only in funds managed by the same investment company.
This kind of strategy aims to achieve a broad diversification and appropriate asset allocation by investing in a variety of fund categories. Interestingly, fund of funds was brought into the limelight by a $ 1 million bet between Warren Buffet and hedge fund manager Protege Partners.
Buffet bet that S&P 500 Index fund would beat the performance of 5 funds of funds picked by Protege Partners over a period of 10 years, after fees. So far it looks like Buffet might be winning the deal.
The Fund of Funds attracts small investors who want to get exposure to few risks compared to investing directly in securities. The most common example of Fund of Funds is target date mutual fund. For example, TATA’s target date mutual funds pool of investors capital and invest in other TATA’s funds. These kinds of funds are common in hedge funds. These have a high minimum investment which exceeds $ 1 million or more.
Hence, investors who cannot pull enough money to invest in such high amounts invest through a fund of funds.
Below are some of the significant features of the fund of funds.
Investing in Fund of Funds allows an investor to test the investing in professionally managed funds before going for individual funding. Most of the Fund of Funds require a formal process before investing.
Despite having some eye-catching advantage the Fund of Funds has its own set of disadvantages.
An investment with Fund of Funds is a good way to enter the investing world if you are an amateur investor. Over a couple of years, more people are seen investing in a fund of funds. This has led to a faster growth of this scheme of investment. The rapid changes in the economy have provided a lot of attention as it provides security. So go ahead, join the league!