Why a fund of funds could be the perfect investment option for you

by , 17 November 2015

When it comes to investing, it's important to build up a diversified portfolio. By diversifying, you reduce the overall risk of your portfolio.

Unit trusts can help you to diversify your holdings. And there is one type of unit trust in particular that could help you achieve diversification easily.

This type of unit trust is a fund of funds.

Read on to find out more…


What is a fund of funds?

 
A fund of funds is a normal unit trust that invests in other unit trusts, instead of shares or other assets.
 
There are two types of fund of funds:
 
#1: Internal fund of funds
An internal fund of funds means the fund invests in unit trusts that are all within its management company’s own range.
 
#2: External fund of funds
An external fund of funds means the fund invests in unit trusts managed by different unit trust management companies.
 
Like normal unit trusts, fund of funds are collective investment schemes.
 

How a fund of funds works

 
Just like buying into a normal unit trust, when you buy into a fund of funds you buy units in it.
 
With normal unit trusts, the fund manager uses the money you invest to buy assets like shares, bonds and cash. You don’t own these assets directly though. The number of units you own determines what portion of the fund you own.
 
On the other hand, with a fund of funds, the manager uses the money you invest to buy units in other unit trusts. You don’t own these other unit trust units directly. The number of units you own determines what portion of the fund of funds you own.
 
What’s great about fund of funds is it gives you instant diversification in one step with a small investment.
 
One thing to bear in mind with a fund of funds is that the costs can be higher than for normal unit trusts. Make sure you check these out.
 
So there you have it. Why a fund of funds could be the perfect investment option for you.
 
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