When investing, whether it be to save for a wedding or university, or even for your retirement the choice of investment strategies are vast. Many companies now offer the potential investor a wide range of funds which can be viewed online from purely cash based through to higher risk equity funds, and without the required knowledge how can you be comfortable with your investment decisions? A fund of funds approach may be the answer.
What is a Fund of Funds or Mutual Fund?
When investing in a financial product, for example a stocks and shares inidvidual savings account (ISA) or a pension, you will be given a choice of investment funds to choose from. Most will opt for a single managed fund run by a single fund manager or the more savvy investor may opt for 2-3 different funds in an attempt to spread the investment risk through diversification. This will be achieved by choosing a low risk fund such as a bond accompanied by a higher risk equity fund to provide an element of balance to the investment.
A fund of funds is a multi-manager approach, which is sometimes called a mutual fund or mutual investing, and works by investing in a wide range of different asset classes under the umbrella of a single fund. This enables the investor to gain exposure to a wider range of assets when compared to a single managed fund or even a number of individual funds. Typical assets would include the following;
- Equities (stocks and shares)
- Fixed Interest (government gilts and bonds)
- Physical Commodities (including gold)
- Hedge Funds
Investment Risk and Investment Strategies
It is often argued that a fund of funds approach is a lower risk investment strategy when compared to investing in several individual funds or a single managed fund due to the wider diversification in a number of asset classes this approach adopts. Equally as important is the fact that the fund managers will rebalance this asset allocation on a regular basis.
If you have chosen several individual funds there is the need to continually monitor and review these funds to ensure they are performing and still meet the your level of investment risk. Additionally the risk of these individual funds will alter over time. In a recession equity funds will increase in risk due to unemployment and uncertainty concerning growth in the economy.
A fund of funds approach takes the responsibility away from you as the investor and instead it is up to the fund managers to ensure that the chosen funds and asset classes remain appropriate by rebalancing the investment in the above mentioned asset classes to ensure overexposure or underexposure to a particular asset class does not occur.
Financial Advice and Investment Strategies
Seeking professional financial advice is paramount when investing to not only ensure that the company you will be investing your funds into meets your investment needs and requirements, but also to ensure that you have fully explored your options. A financial advisor will be able to inform you of the range of investment products available and help you decide on the most appropriate investment solution.
A fund of funds approach is more costly than a traditional investment strategy but many feel is a price worth paying. This is due to the extra level of service received through the regular rebalancing of assets leading to the very real potential of superior fund performance and growth.