Glossary term
Fund of Funds (FOF)
A fund of funds is an investment fund that invests in other funds instead of primarily buying individual stocks, bonds, or other securities directly.
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What Is a Fund of Funds?
A fund of funds, or FOF, is an investment fund that invests in other funds instead of primarily buying individual stocks, bonds, or other securities directly. The underlying funds may be mutual funds, ETFs, private funds, hedge funds, or other pooled vehicles depending on the strategy.
Target-date funds are a common retail example of funds of funds because they often hold a mix of underlying stock and bond funds.
Key Takeaways
- A fund of funds invests in other funds.
- It can offer broad diversification and simplified allocation.
- Investors may pay fees at both the fund-of-funds level and the underlying-fund level.
- Layered holdings can reduce transparency.
- A fund of funds still needs review for cost, risk, overlap, and fit.
How a Fund of Funds Works
Instead of selecting individual securities, the FOF manager selects underlying funds. That can make it easier to create a diversified allocation across asset classes, managers, strategies, or regions.
The tradeoff is layering. Investors own a fund that owns other funds, and those funds own the underlying investments. That can make it harder to see exact exposures and total costs.
Potential Benefits and Tradeoffs
Potential benefit | Tradeoff to review |
|---|---|
Diversification across strategies or asset classes | Possible overlap among underlying funds |
Professional manager selection | Less direct control over holdings |
Simplified portfolio construction | Layered fees and expenses |
Access to specialized strategies | Less transparency or more complexity |
Why Fund of Funds Costs Matter
Costs can be easy to underestimate. A fund of funds may charge its own expenses while the underlying funds also charge expenses. In fund disclosures, investors may see these indirect costs described as acquired fund fees and expenses.
A fund of funds can still be worthwhile if the allocation, diversification, and management value justify the cost. But investors should compare the total cost with simpler alternatives.
The Bottom Line
A fund of funds invests in other funds to build a broader allocation. It can simplify investing, but investors should look closely at fees, transparency, overlap, and whether the extra layer improves the portfolio enough to justify its cost.