Fund of Funds: Benefits & Risks Explained

Investing in a fund of funds may be something that you want to consider for your portfolio. Here are the basics of the fund of funds as well as some of the advantages and disadvantages associated with it.

Fund of Funds

This is a mutual fund that uses its assets to purchase shares of other mutual funds. While most mutual funds will invest directly in the stock market or bonds, this mutual fund simply stays in the mutual fund market for its investment.

Advantages

One of the advantages of this type of fund is that it provides you with superior diversification. The mutual fund that you invest directly in will be diversified by purchasing shares of many different mutual funds. The mutual funds that make up the underlying asset also have very diversified portfolios of their own. This lowers the overall risk for you and makes it a very safe investment for sustained growth.

Disadvantages

This type of investment carries with it increased transaction costs. Mutual funds are notorious for being expensive to invest in with all of the fees associated with them. Then when you invest in more mutual funds, this eats up your profits quickly. This type of investment also has very limited growth potential overall.