FOF (Fund of Funds), as the name implies, is a "fund of funds",is a kind of financial products operated by several managers which invest in other types of funds. That is to say, the portfolio replaces the stocks, bonds and other securities invested in other funds.
The average FOF fund returned 4.55 per cent, with 168 out of 177 traded funds Posting gains. The report card for 2021 is very impressive, and FOF has become a good financial product. Recent fund market volatility increases, the original big red funds have a big dive.
FOF carries the investment strategy to have a diversified, wide-ranged and proper asset allocation. It invests in a different fund classes and put them into another portfolio. different investment plans are applicable to different types of FOF. The FOF is normally constrained which allows it to invest in funds managed by other fund managers.
Generally speaking, FOF attracts small investors who have higher expectations of returns and bear less risks compared to the risks happened in investing in a single fund and other securities. Investors can enjoy professional wealth management services by investing in FOF. Investors of FOF are enable to use limited funds to own a diversified assets with different investment targets. Individual investors usually don’t have access to those targets.
The biggest difference with other types of funds is that FOF managers use the money they raise to buy a basket of funds, rather than buying certain stocks and bonds outright, although the underlying assets may end up being the same. FOF investment can greatly diversify the risk of investment, which is very friendly for investors with low risk appetite.
Now let's talk about the shortcomings of FOF fund, there are three main points: one is the overlaying of management expenses. Although FOF offers diversified investment options and a lower risk of market volatility, its investment returns may be reduced by investment fees, which are generally higher than those of traditional investment funds. Most funds are subject to subscription, redemption and management fees. However, as a fund of funds, FOF obviously has the superposition of expense rate in the whole process of investment, and investors actually pay double fees. Therefore, FOF is more suitable for long-term holding, not friendly to short-term investors, and the final return will be mediocre.
The second is the risk of overlapping holdings. There will be overlapping holdings of underlying assets or similar industries in the fund portfolios held by the fund basket. In this case, the impact of the rise and fall of a single stock will be amplified, resulting in greater volatility of the fund as a whole.
Third, it is difficult to select good fund managers and funds. It used to be that you only need to study the investment style and holdings of a single fund manager to buy a fund, but under the mode of FOF, you need to know more. Although you buy a fund, you actually need to be served by multiple fund managers and hold a lot of targets, which increases the difficulty for investors to choose.