Fund of funds
Also known as: FoF
A fund of funds is a fund that builds its by investing in other funds rather than buying individual , , or other securities directly. Instead of a manager picking specific companies to own, the manager picks a mix of underlying or , effectively building a of .
This structure is common in target date , which typically hold a mix of underlying and funds and shift that mix over time as the target date approaches, and in some fund of vehicles, which give investors diversified exposure to multiple managers through a single investment. The appeal is convenience and instant across strategies or asset classes that would otherwise require buying and monitoring several separate funds individually.
The main drawback of a fund of funds is layered fees, an investor typically pays the fund of funds its own management fee on top of the fees already charged by each underlying fund it holds, which can meaningfully raise the total cost compared with buying the underlying funds directly. Investors evaluating a fund of funds should look at the combined across both layers, not just the headline fee charged by the fund of funds itself, since that headline number understates the true annual cost.