The term fund of funds refers to a portfolio of mutual funds held by a single mutual fund. The objective of a fund of funds is to provide investors with diversification within a specific asset allocation framework.
Also known as a multi-manager investment, a fund of funds (FOF) attempts to offer individuals diversification through the purchase of mutual funds. These funds can provide investors with an allocation of assets that aligns with their objective. For example, a fund of fund's investment objective could be capital appreciation.
Generally, these investments fall into one of two broad categories:
Fund of funds typically charge fees that are high relative to other types of mutual funds. This is due to the fact the investor is not only paying fees to the FOF's management team, but also the fees associated with the underlying funds. In fact, this double fee structure was not always revealed in the FOF's prospectus. In January 2007, the Securities and Exchange Commission (SEC) began requiring fund of funds to disclose these fees under the heading Acquired Fund Fees and Expenses (AFFE).