Fund of FundsFOF
A fund of funds invests in other funds instead of buying stocks or bonds directly. It offers broad diversification and access to many managers, but investors pay two layers of fees — the fund of funds' own and those of the underlying funds.
Picking one good fund is hard; picking a dozen is harder. A fund of funds does the selecting for you, spreading money across many managers or strategies. It's common for hedge fund and private equity access, as well as target-date funds. This entry explains how it works, the benefits and the costly downside of double fees.
- Category
- Trading Basics
- Reading time
- 3 min
- Also called
- Funds of funds, FoF, Multi-manager fund
- Updated
Funds of funds in plain words
A fund of funds invests in a portfolio of other funds rather than directly in stocks, bonds or other securities.1
The aim is broad diversification and asset allocation, with wider exposure and lower risk than investing in individual securities.1
Higher fees and expenses can significantly lower investment returns over time — a key issue with layered fund structures.2
How a fund of funds works, step by step
Investors buy the FoF
One investment.
The manager selects funds
Across styles or managers.
Money is allocated
Weights set by strategy. See Diversification.
Underlying funds invest
In stocks, bonds or alternatives.
Two layers of fees
FoF fee plus underlying fees. See Expense Ratio.
Rebalancing
Adjusting fund weights. See Rebalancing.
Worked examples
Example 1 — Layered fees
1.5% a yearA FoF charges 0.5%; its underlying funds average 1.0%.
| Total yearly cost | 0.5% + 1.0% = 1.5% |
| On $100,000 | $1,500 a year |
Two fee layers raise costs, and higher fees can significantly reduce returns.2
Example 2 — Diversification
Very broadA FoF holds 8 funds that together own about 1,200 securities.
| Securities covered | ≈ 1,200 |
Investing through other funds provides broad exposure with lower single-security risk.1
Example 3 — Hedge fund access
Lower minimumA FoF has a $25,000 minimum while each hedge fund requires $1m.
| Access | Many managers for a small stake |
Funds of funds give smaller investors exposure to managers they couldn't access alone. See Hedge Fund.
Fund of funds vs single fund
| Aspect | Fund of funds | Single fund |
|---|---|---|
| Holdings | Other funds | Securities directly |
| Diversification | Very broad | Depends on fund |
| Fees | Two layers | One layer |
| Manager risk | Spread across managers | Concentrated |
Where funds of funds are used
Target-date funds
Mixing stock and bond funds. See Balanced Fund.
Hedge fund access
Multi-manager portfolios. See Hedge Fund.
Private equity
Access to several PE funds.
Model portfolios
Ready-made allocations. See Portfolio.
Advantages and disadvantages
Advantages
- Instant diversification.
- Professional fund selection.
- Access to otherwise closed managers.
Disadvantages
- Double layer of fees.
- Possible overlap between funds.
- Less transparency.
Going deeper
Read as far as you need. Each level builds on the one before it.
Asset allocation in one product
Beginner
Investing in a fund of funds aims for broad diversification and asset allocation in a single holding.1 See Diversification.
Overlap
Intermediate
Several underlying funds may own the same stocks, reducing the real diversification you pay for. See Portfolio.
Performance fee layers
Advanced
In hedge fund FoFs, both layers may charge performance fees, which can take a large share of gains. See Two and Twenty.
Common mistakes
Ignoring total costs
Add both fee layers.
Assuming more funds = more diversification
Overlap is common.
Overlooking liquidity terms
Underlying funds may restrict withdrawals.
Chasing past winners
Manager selection is hard.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- A fund of funds invests in other funds.
- It offers broad diversification.
- Fees are layered.
- Overlap can reduce real diversification.
- It can open access to exclusive managers.
Frequently asked questions
Are target-date funds funds of funds?
Are funds of funds worth the extra fees?
Can ETFs be funds of funds?
Further learning
- Expense Ratio
Understanding fee layers.
- Hedge Fund
A common FoF target.
- Balanced Fund
A related all-in-one product.
- Diversification
The main benefit.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Corporate Finance Institute. Fund of Funds (FOF) (opens in a new tab) Checked .
- Investor.gov (SEC). Index Fund (glossary) (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.