Fund of Funds - Streamlining made possible?
One of most frequent questions I get when it comes to investing is “How do you know which stocks to pick”. The answer to that question is a lot more complicated than what meets the eye as there are so many different ways that people use to choose their investments. Financial analysis is very diverse and many people (including myself) use different metrics to try to find our investments. In reality, there is no “one size fits all” (although people will try to put it that way) as each investor has a different time horizon, thesis and risk tolerance. Luckily, the financial industry is constantly looking for different products that can help investors diversify their options and not end up in this endless cycle of “choosing which investments to put their money in”.
A fund of funds or FOF aims to serve that need. Basically a fund of funds takes a mutual fund to the next level by holding units of other funds. It is a very interesting tool as how a mutual fund is usually limited to either a stock or bond fund, FOF can have units in bonds, stocks, emerging market funds and all these other categories of investments that are out there. The beauty with FOF’s is that it allows smaller investors to gain exposure to multiple securities without having to individually buy each security - a process that can be costly and actually hurt your diversification.
FEES FEES FEES and what about those ETF’s I've heard so much about?
To date, I don’t think there are ETFs that are a combination of other ETF’s. Since ETF’s are traded like stocks this also means that there will be commissions to purchase but the management fees will be considerably lower.
One of the hitches with FOF’s is that the MER’s are generally higher than your typical mutual fund. This is because as an FOF investor you will have to pay the fund manager as well as the corresponding MER’s in each of the holdings.
I find the greatest benefit with FOF’s is the fact that like other mutual funds, it is very easy to purchase fractions of units. This is really good for investors who are contributing smaller amounts but can still share in the gains of investing. There is also no commissions to trade mutual funds.
All in all FOF’s just add another tool to your arsenal and investors. I find it a great tool to gain exposure to different areas that are appealing to each individual investor without having to over-extend yourself to one particular fund. It also helps simplify investment decisions by blending several funds together - streamlining the process.
Disclaimer: All of the above information is my own personal opinion. Please do your research when making any investment decisions and please consult with a licensed representative before making any financial decision.
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