A mutual fund is a type of investment option where funds from various investors are pooled together and invested in stocks, other money market instruments, and assets. Mutual funds are usually managed by fund managers who allocate the money in order to gain capital and income for the investors. A fund of funds (FOF) is similar to a mutual fund in terms of pooled funds from various investors. A fund of funds portfolio contains various underlying portfolios of funds.
How do they work?
In mutual funds, when investors invest in securities, they are also buying partial ownership of the company and its assets.
A fund of fund investment attempts to achieve an all-in-one portfolio with proper asset allocation in a diverse variety of fund categories.
The advantage of investing in a mutual fund is it is easier to invest in or exit a mutual fund scheme when the stock market prices are high and make a profit.
A fund of funds investment is lucrative for small-type retail investors who want to get better exposure at a lower risk rate. Investing in a fund of funds also offers these investors wealth management services.
A common disadvantage of both mutual funds and fund of funds is that they both charge a high fee for the management of the fund account. Also, a higher investment fee does not guarantee promising returns.
Types Of Mutual Funds
Mutual funds are mainly of two types – close-ended funds, and open-ended funds. Mutual fund investment schemes are ideally suited for investors who are averse to risk and who wish to add financial discipline to their life.
Types Of Fund Of Funds
There are different types of fund of funds – gold funds, multi-manager fund of funds, international fund of funds and exchange-traded funds. Fund of fund investments aim to provide an increase in returns by investing in a diversified portfolio that has minimal links. The ideal investors for this scheme are those who have a minimal pool of resources that they can afford to spare for an extended period of time. Investors who have a low liquidity need are ideally suited for fund of funds schemes.