There are quite a few different types of funds that you can have. Many differences exist between these types of funds, ranging from the financial products that they include to their respective risk levels. However, one fact that remains consistent for all types of funds is that they can be a great investment if they are created and managed properly. That is why so many people have funds.
One type of fund is known as a Fund of Funds portfolio. This is a somewhat less common type of fund. As such, it is best to discuss it in more detail. Read on to find out what this kind of fund is and what benefits it provides.
Fund of Funds 101
A fund of funds is a type of pooled investment fund and this kind of investment fund invests in other kinds of funds. Simply put, a Fund of Funds portfolio includes different fundamental portfolios that are part of other funds. As a result of this, those holdings take the place of investments in stocks, bonds, and other securities. When you take a look at a Fund of Funds (FoF), you typically see that it invests in hedge funds or other kinds of mutual funds.
There are two primary classifications of FoFs. The first classification of an FoF is fettered. This means that the FoF can only invest in funds that are managed by the company that manages the FoF. The second classification of an FoF is unfettered. As you might guess, this means that the FoF is free to invest in a variety of funds on the market, regardless of which company manages those funds.
The general strategy when you invest in an FoF is to accomplish broad diversification while still keeping risk minimal. As such, FoFs are considered a safer investment than some other kinds of financial portfolios. A Fund of Funds provides several benefits, as well.
Benefits of a Fund of Funds
Great Diversification
One benefit of an FoF is that it provides you with excellent diversification. An FoF provides you with access to a variety of mutual funds that have different investment objectives via one investment. There are a number of examples that can help illustrate this point.
Real estate, commodities (silver and gold), and alternative investments like Bitcoin are examples of a Fund of Funds. Importantly, you do not have to invest in all these mutual funds on your own if you have an FoF. This means an FoF gives you excellent diversification without the work required to invest in many different mutual funds on your own.
Simplified Rebalancing
Rebalancing is a crucial part of managing your investment portfolio. Rebalancing your portfolio may mean that you need to buy certain investments and sell other investments. You may have to pay capital gains tax if you end up selling investments as part of rebalancing your investment portfolio. This is generally the case.
Capital gains tax is not applicable to portfolio rebalancing transactions when done by the various funds that comprise an FoF, though. Because of this, you can enjoy the benefits of rebalancing your portfolio while not having to pay the tax burden that usually accompanies portfolio rebalancing. This is a major advantage of a Fund of Funds portfolio.
