Pooled funds are often recommended for beginner investors because they’re managed by professionals and allow you to put money in a “basket of investments.”
A fund of funds takes things a step further by letting you invest in a mix of pooled funds.
Learn all about this investment product below.
How it works
A fund of funds (FoF) is exactly what it sounds like: a type of investment fund that invests in other investment funds, instead of directly buying individual assets.
In a regular investment fund, the fund manager invests in a portfolio of assets like stocks, bonds, and money market instruments.
In an FoF, the fund manager invests in a portfolio of other funds like mutual funds, Unit Investment Trust Funds (UITFs), and exchange-traded funds (ETFs), among others.
Funds within an FoF are called target funds. A feeder fund is a type of FoF that only has 1 target fund.
As with other investment funds, investing in an FoF means you’re pooling money with other people. The fund manager decides where to allocate the pooled money to possibly meet the fund’s goal.
Each target fund also has its own manager who will try to do the same.
Should you invest in a fund of funds?
Is an FoF the right choice for you? The answer depends on your goals, risk tolerance, and the amount of time you can dedicate to managing your investments.
Take a look at these potential benefits and drawbacks to know whether an FoF can help meet your needs:
Possible advantages of a fund of funds
1. Broader diversification
To manage investing risk, it’s ideal to diversify by putting your money in different investments. Pooled funds may offer quick diversification by allowing you to invest in different assets in one go.
Here’s how FoFs can take the ease of diversification to another level:
- Many different assets
With the right FoF, you can spread money across different pooled funds with different investments inside each one.
- Access to global investment funds
Certain FoFs invest in global funds and may offer diversification across geographic locations. Some may even allow you to invest using Philippine pesos.
This way, you won’t have to open a dollar account or look for an overseas investing service.
The level of diversification you’ll get may vary depending on the objective of the FoF. Some may invest in funds from specific countries while others may maintain a “theme” by focusing on funds that invest in certain asset types or industries.
2. Lower minimum investment
There are investment funds that require relatively high minimum investment amounts. If you want a more affordable way to invest, you can look for an FoF that allows you to invest in those target funds at a lower minimum amount.
Possible disadvantages of a fund of funds
1. Layers of fees
FoFs charge fees in exchange for the convenience of professional management. On top of that, the target funds of an FoF can also come with fees.
Over time, these fees can stack up and eat into your returns. It’s important to keep them in mind so you can decide whether the potential benefits are worth the costs.
2. Limited control
If you want full control over where your money goes, an investment fund like an FoF might not be the best option. It’s like buying a premade gift basket where you won’t get to choose the items inside and what each item contains.
With minimal control, it’s also possible to overlook duplicate investments in your portfolio. Different funds within an FoF may be exposed to the same or similar assets.
The underlying funds may also include investments like stocks or bonds that you already bought individually or invested in via other pooled funds. This can potentially limit the diversification of your overall portfolio.
3. Overdiversification
When it comes to diversification, more isn’t always better. Overdiversification can happen if your money is spread too thin across too many assets.
This may water down your returns and lessen the effect of any added risk reduction.
Things to remember
Given the pros and cons, here are the key factors to keep in mind before investing in an FoF:
- You can consider FoFs if you prefer a passive investing approach and don’t have a lot of money, time, or expertise to research and pick individual investments.
- FoFs can offer broad diversification, though there’s a risk of overdiversifying or having duplicate investments.
- FoFs can provide access to investment funds that may be out of reach due to high minimum investment amounts.
- You should be willing to pay the fees in exchange for convenience and professional management.
