Truth About Fund of Funds

By: Al Thomas
Submitted: 2007-01-17 16:17:39
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First let’s understand what a fund of funds is as I seriously doubt your broker has ever told you about them. Why? Because it will take away from his commissions. A regular mutual fund is composed of stocks or bonds. An index funds such as the S&P500 is composed of 500 stocks while a sector fund might have only 20 or 30 stocks. Almost all mutual fund prices are figured at the close of the market which is the price the investor pays. Plus commission unless it is a no load fund. All smart investors only buy funds that do charge commission.

No load funds are as good as funds that charge commission. Do not believe anything a broker might tell you otherwise. All funds have expenses that include commissions the fund must pay when they buy or sell stock. There are management fees. They have overhead as does any business such as rent, heat, light, salaries and etcetera. Be careful of the etc.

Many mutual funds have recently added redemption fees. A redemption fee has a charge of as much as 2% if the investor sells before a certain time period such as 90 days to a year or more. This is one of the great rip-offs. They give you nonsense reasons for this charge, but the real reason is to keep you from selling their fund.

Mutual fund expenses usually run about 1.5% of the total amount of the fund each year. As a fund gets larger the expense ratio should become smaller, but it rarely does. Fund managers just increase expenses most of which goes into their pockets.

A fund of funds is a mutual fund that buys other mutual funds. Almost always they have a special arrangement so there is no commission or a reduced fee. Fund managers want all the money in their fund they can get as they are paid on the amount of money in the fund and not on performance. The average money manager makes about $300,000 whether he makes the investor money or not.

The type of fund an investor wants to buy is one that goes up. Unfortunately many funds do not. A smart investor sells the weak fund and switches to the strong funds. He never gets married to any fund because there is no such thing as a “good” fund. Even those with a good reputation have loss periods when the investor should either be in another fund or in a money market to protect his capital.

Brokers will tell their customers that funds of funds are no good because there are extra expenses the customer is paying for in each fund. They also talk about the extra hidden fees. Of course they are not going to tell the good points.

The fund of funds gives immediate diversification and it makes it simple for the investor. It is especially attractive for those who do not know which funds to buy or someone who does not have time to do research. It allows the small investor to diversify among hundreds of stocks and many sectors.

There are very few good fund of funds. Many investors like the concept of FUNDX which switches from poor performing funds to those going up. It is also a no loads fund which makes it doubly attractive so the investor won’t have to make changes from poor performing sectors to those becoming stronger. This is the only fund I know of that does this.

Any smart investor will investigate the fund of funds before committing to a regular mutual fund.

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