How do fund-of-funds charge fees compared to regular mutual funds?

When it comes to investing, costs matter. Fund-of-funds (FoFs) and regular mutual funds both charge fees, but the way these fees are structured is quite different. In this blog, we’ll break down the fees charged by fund-of-funds and how they compare to the fees of regular mutual funds, so you can make an informed decision.

How Do Fund-of-Funds Charge Fees Compared to Regular Mutual Funds?

Fund-of-funds typically charge two layers of fees. First, there's a management fee for managing the fund's portfolio, which ranges from 1% to 2%. Secondly, because fund-of-funds invest in other mutual funds, you also pay the fees of the underlying funds (which can add another 1% to 2%). In total, the fees can range from 2% to 4%.
In contrast, regular mutual funds generally charge only one management fee, which is usually lower, ranging from 0.5% to 2%. Therefore, fund-of-funds tend to have higher fees than regular mutual funds.

Types of Fees Charged by Fund-of-Funds

Here are the two main types of fees charged by fund-of-funds:

• Management Fee: The fund manager charges a fee for selecting and managing the mutual funds within the fund-of-funds.
• Underlying Fund Fees: The mutual funds that the fund-of-funds invest in also charge management fees, which are passed on to you.

How Do These Fees Impact Investors?

The extra layer of fees in fund-of-funds can reduce your returns over time. While they offer convenience and diversification, they can be more expensive than regular mutual funds, which charge only a single management fee. For long-term investors, these extra costs can add up, making regular mutual funds more cost-effective in many cases.

How to Choose Between Fund-of-Funds and Regular Mutual Funds

Deciding between a fund-of-fund and a regular mutual fund depends on your needs:

• If you want diversification with less effort: Fund-of-funds can give you exposure to multiple funds in one go, making it easier to diversify your investments.
• If you’re cost-conscious: Regular mutual funds are generally cheaper and could be a better choice for long-term investors.
• If you want control: Regular mutual funds allow you to pick a specific fund based on your risk tolerance and investment goals.