Understand below how it works.
How does a FoF or Fund of Funds work?
In a very simplified way, an FoF works like this: a manager (the entity responsible for the fund) designs a strategy for its fund considering the expected profitability , the risk potential, etc. She looks to the market for which investment funds make sense for this strategy.
From this, the manager makes negotiations with other funds and creates its FoF: how much of each fund will be allocated, when is the time to buy or sell assets, how the risk and earnings potential of each fund will be balanced to meet the FoF strategy… This is an extremely complex job that involves dozens of different factors.
At the end of the process, the fund manager is designed: a “package” with several other packages. In other words, a fund composed of other funds.
In practice: a person who puts his money into an FoF is buying shares from it, and these shares have certain values. Depending on how much money is invested, each person buys more or less shares.
The manager, in turn, gathers the money of all shareholders (the fund’s total equity) and allocates amounts to the various funds that make up the FoF in accordance with the designed strategy. In other words, it buys shares from other funds in the proportion that best meets the expected results.
What are the advantages of FoF?
If FoF is formed by other funds, what is the advantage of investing in it? Why can’t a person simply put their money into the various investment funds that comprise it and cut off the middleman?
Power, even can. But, depending on the strategy devised by the manager, investing in FoFs can be more advantageous for two main factors: diversification and lower initial investment .
It is worth remembering that there are specific closed funds for new applications that are not by FoF. In other words, you can only access some funds through…other funds.
Diversification in FoFs: what does it mean?
An investor’s portfolio is the set of products in which that person invests his money. By investing in FoFs, this person is adding to their portfolio many different products, which helps to better balance risk and gain.
As they are more diversified, FoFs can reduce price volatility (variation) and dilute the risks of each investment. If there is any fluctuation in the market, or an unexpected drop in one of the assets, the others can hold the loss.
But the Funds of Funds are not risk-free: in most cases, they consist of investments in income varies v el , ie accompanying market fluctuations and have profitability guarantee.
Different FoFs have different degrees of risk. If the manager designs a more conservative strategy, placing most of the equity in funds considered safe, the risks tend to be lower, but so are the gains. If, on the other hand, a larger percentage is allocated to riskier investments, the chance of gains and losses is higher.
Therefore, when investing in an FoF, it is very important to know information about the manager – if it is trustworthy, if it has a proven track record in the market, etc. After all, her professionals will be effectively responsible for handling the money.
Lower initial investments in FoFs
In some cases, FoFs ask for a lower initial investment than their component funds. This means that investors with less money can invest in products they would not normally have access to.
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For example: a certain stock fund can only accept investments starting at R$ 10 thousand. If he enters into a FoF, and the FoF has a minimum initial investment of R$100, this means that a smaller investor can access a sophisticated product that would not otherwise be possible.
What are the existing Funds of Funds?
There are Funds of Funds of different types. Can be fofs Real Estate, Multimarket of Shares of Fixed Income … Everything will depend on the types of assets that make up the funds of each FoF.
- Equity Funds (FoF FIA): are funds of funds composed primarily of equity funds – that is, funds that invest in various stocks.
- Multimarket Funds Funds (FoF FIM): most of the funds that make up the FOF are multimarket , that is, they can invest their assets in various assets (such as currencies, stocks, indices, fixed income bonds, etc.).
- Real Estate Funds Funds (FoF FII): These funds are mainly made up of real estate funds .
What are the fees for a FoF?
Funds of Funds usually have some specific costs and fees, which may vary by manager. Examining these costs before investing is important as they impact yields.
The main rates that usually appear in FoFs are:
- Administration fee: it is charged for managing the fund and to remunerate the institutions involved in its administration. The percentage is annual, but the rate is proportionally discounted every day.
- Performance fee: when the fund performs better than expected (that is, when yields exceed expectations), it is charged on the excess yield, as if it were a “bonus” for the manager.
Remembering: these fees are not fixed and may or may not exist according to the institution and the chosen fund.
There is yet another fee that actually ends up being beneficial to FoFs: the rebate rate . Basically, each fund that makes up the FoF charges its own fees from its investors.
A percentage of these fees is returned to the FoF, as if it were a remuneration to the institution for having brought in new investors – this is the rebate. This value is negotiated by the manager with each invested fund and can be incorporated into the FoF itself and can help with profitability.