As an investor you regularly face a choice: do you invest in individual funds you select yourself, or do you choose a fund of funds where a professional manager makes that selection for you? Both approaches have their place in the investment world, but the best choice depends on your experience, available time and financial situation. In this article we explore when a fund of funds strategy can be advantageous compared with building a portfolio of individual funds yourself.
What is the difference between a fund of funds and individual funds?
A fund of funds invests in a selection of other funds instead of directly in equities or bonds, while individual funds are each managed separately and invest directly in underlying assets. With individual funds you decide yourself which funds you buy and in what proportions, while in a fund of funds a professional manager takes those allocation decisions.
The core difference lies in the management structure and responsibilities. When you buy individual funds, you are responsible yourself for the selection, timing and rebalancing of your portfolio. That requires knowledge of different fund categories, market developments and risk management. A fund of funds, by contrast, offers a structured approach in which experienced portfolio managers take on fund selection and allocation.
These professional managers continuously analyse the performance of underlying funds, adjust allocations based on market conditions and ensure risk spreading across different investment categories. For investors this means access to institutional expertise without the daily management burden.
When is risk spreading through a fund of funds advantageous?
Risk spreading through a fund of funds is mainly advantageous when you want access to diverse, professionally managed strategies without having the expertise to select and monitor them yourself. Funds of funds offer automatic diversification across investment categories, geographic regions and investment styles.
An important advantage arises with access to alternative investment strategies that are normally available only to institutional investors. Think of market-neutral strategies, precious metal funds or specialised fixed income approaches. These strategies often have higher minimum investments and require specific due diligence knowledge.
For investors with limited time or expertise, a fund of funds also has advantages in managing correlations between different funds. Professional managers monitor how different funds behave relative to each other and can adjust quickly when correlations rise unexpectedly during market crises.
On top of that, continuous monitoring by portfolio managers means underperforming funds are replaced in time, something that in self-management is often postponed because of emotional considerations or a lack of time for thorough analysis.
How do the costs compare between a fund of funds and individual funds?
A fund of funds generally has higher total costs because you pay both the management fee of the fund of funds itself and the underlying costs of the individual funds it invests in. This double cost structure can result in total annual costs of 1.5% to 3%, depending on the complexity of the strategy.
When you select individual funds yourself, you only pay the management fee of each individual fund, which can be very low with passive index funds and ETFs (0.1% to 0.8% per year). For actively managed funds, costs are usually between 0.5% and 2% per year.
The cost advantage of individual funds is nuanced by other factors, though. Transaction costs from regular rebalancing, the time you invest in research and monitoring, and possible suboptimal timing decisions can partly cancel out the lower management fees.
For investors with substantial capital, a fund of funds can be cost efficient when it offers access to institutional funds with lower costs than retail alternatives, or when the added value of professional management compensates for the extra costs through better risk-adjusted returns.
Which investors benefit most from a fund of funds?
Experienced investors with substantial capital but limited time for active portfolio management benefit most from a fund of funds, as do investors seeking access to specialised strategies that are not individually accessible. Investors who value professional risk management and continuous monitoring also find advantages here.
Entrepreneurs are an important group because they often have the necessary capital but want to spend their time primarily on their business. A fund of funds gives them access to institutional investment quality without the daily management burden.
Retired investors with considerable capital can benefit from the more stable, more balanced approach that funds of funds offer. The focus on capital protection and consistent allocation fits well with the need for predictable income and preservation of wealth.
Investors interested in market-neutral strategies or alternative investments often find that a fund of funds is the only practical way to access these specialised strategies. The expertise and networks of professional managers open doors that stay closed to individual investors.
How do you choose between an actively managed fund of funds and selecting funds yourself?
The choice depends on your available time, level of expertise, size of capital and investment objectives. Choose an actively managed fund of funds when you want access to institutional strategies, value professional risk management and have enough capital to justify the extra costs.
First evaluate your own situation: how much time can you realistically spend on investment research and portfolio management? Do you have the knowledge to assess different fund categories and estimate market risks? Is your capital large enough to reach sufficient diversification with individual funds?
For investors with limited time or expertise, an actively managed fund of funds has clear advantages. The professional selection and monitoring of underlying funds, combined with systematic rebalancing, can lead to better risk-adjusted returns than self-management.
BOTS Capital, for example, combines AI-driven fund selection with human portfolio management expertise. The multi-asset funds offer access to strategies such as alternative funds, liquidity strategies and market-neutral approaches that are hard for individual investors to reach.
Choose to select funds yourself when you have enough knowledge, time and discipline to build and maintain a diversified portfolio. That can be more cost efficient with smaller amounts of capital or when you follow a simple investment strategy with broadly diversified index funds.
In the end the decision comes down to the balance between control, cost and convenience. A fund of funds offers professional management and access to specialised strategies, while self-management gives more control and potentially lower costs, but demands more time and expertise.
Please note: investing involves risk. You may lose part or all of your investment.