Fund of Funds - Strategies and Fees

What are Fund of Funds?

A fund of funds is a mutual fund which invests in a group of funds instead of picking specific stocks.  These funds of funds have a great appeal to investors, because it gives the perception of greater diversification.

Fund of Funds Strategies

The basic strategy for fund of funds is to select mutual funds which are outperforming all of their competitors.  The basic logic is that these funds will continue to outperform regardless of the changes in the market environment.

Fund of Funds Fees

Fund of funds fees can be much higher than the standard fees associated with mutual funds.  This is because investors will have to pay the fees associated with not only the mutual fund, but also the fees of the actual funds where there dollars are invested.  In essence, the investor could be paying double fees since they are actively invested in two companies.  Some of the larger mutual fund companies have found methods for getting around these fees by purchasing funds from their own company.  For example, an investor can select a fund of funds from Fidelity, which are exclusively made up of Fidelity mutual funds.