Investment Types - Fund of Funds
Fund of Funds
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Fund of funds

Unlike a traditional investment fund which invests in a portfolio of shares or bonds, a fund of funds invests in a selection of other funds. They have become extremely attractive for investors who are uncertain which funds to pick in times of economic uncertainty.

However, fund of funds have been criticised for having a double layer of charges. Investors pay for the management of the fund of funds as well as paying for the funds held within the overall fund. Each of those funds has an initial charge as well as an annual management charge. Investment houses offering fund of funds have defended these charges, saying they are able to negotiate discounts on the fees normally levied. Some have argued that fund of funds easily recoup these slightly higher fees, but you must ensure you examine the charges and the total expense ratio (TER) when buying this type of fund and weigh up whether the returns will be worth the costs. One way of keeping the costs down is to opt for a fund of funds which only chooses other funds in the same investment house, although this obviously restricts the choice and diversification for investors.

As with all investments, you should also keep in mind that the value of funds can go down as well as up and you may get back less than you invested. Although funds of funds are designed to limit risk, the fund of funds will only perform as well as the individual funds within it.

Furthermore, you still need to be aware about where the fund of funds is investing, and make sure the chosen funds match your risk appetite. Funds which are labelled "cautious" or "aggressive" may not match your definition of cautious or aggressive, and it is worth examining the underlying investments carefully.

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