If you haven't heard of a fund of funds, you might think it is just a redundancy. The truth is a fund of funds has some important advantages and disadvantages that you need to be aware of. A fund of funds is exactly what it sounds like. It is a mutual fund that invests in other mutual funds. At first it may seem silly to you, but here are some big advantages to investing in a fund of funds:
Double Diversification -A mutual fund diversifies across many different stocks. A fund of funds diversifies amongst many different funds.
Simplicity -Instead of investing in many different funds to achieve the same result, you can just invest in one fund. This allows for much less paperwork.
Cheap for Beginning Investors -It is tough to diversify when starting out because of account minimums. A fund of funds allows for an investor to diversify amongst hundreds or thousands of stocks in one small account.
Institutional Advantages -Funds of funds can often invest in desirable institutional funds that are off-limits for retail investors. They also have the ability to invest in some load funds without paying the load.
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