What is a Fund of Funds?

Defining Funds of Funds and When to Buy Them

When is it a good idea to buy a fund of funds?. Getty Images

Why buy several mutual funds when you can buy one that invests in several others? This question was likely asked when the first fund of funds was created. Here's what to know about them.

Fund of Funds Definition and Benefits

A fund of funds (FOF), is just as it sounds: A mutual fund that invests in other mutual funds. Benefits of funds of funds include diversification and cost savings.

For example, a beginning investor may not be able to meet the minimum required initial purchase amount, which can be up to $3,000 for many of the popular no-load funds, but the investor wants diversification.

These two challenges can be simultaneously solved by purchasing a fund of fund.

Example of a Fund of Funds

For a simple example, look no further than Vanguard's "LifeStrategy" funds. Each fund has a strategy or style, such as growth, income, conservative and moderate.

Vanguard LifeStrategy Growth (VASGX) invests in four other Vanguard funds - Vanguard Total Stock Market Index (VTSMX), Vanguard Total International Stock Index (VGTSX), Vanguard Total Bond Market II (VTBIX), and Vanguard Total International Bond Index (VTIBX).

Each of the four fund holdings have a minimum initial investment amount of $3,000. To build this portfolio yourself, you would need at least $12,000 to get started. Instead, you could buy the VASGX fund of funds and have all four at the $3,000 minimum level.

Other types of funds that employ the fund of funds approach are some balanced funds and most target-date funds.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.