Fund companies advertise that they generate high returns for their customers with funds of funds. But this promise is usually not fulfilled. Because funds of funds have several disadvantages.
Anyone who wants to invest money over the long term will sooner or later come across investment funds – and a huge selection. Equity funds, bond funds, real estate funds: there doesn’t seem to be a lack of opportunities. And it can be more complex.
Because there are not only funds that put together a bundle of stocks, bonds or real estate for their investors, but also those that invest in other funds themselves. This is then a so-called fund of funds – a bundle of many bundles, so to speak.
But is that a smart strategy? Or are other investments better suited for your wealth accumulation? Our overview provides the answers.
What is a fund of funds?
A fund of funds is an investment fund that does not invest its investors’ money directly in stocks, bonds or real estate, but in other investment funds that have themselves invested money in stocks, bonds or real estate. So it unites many different funds under one roof, so to speak. Funds of funds come in different risk profiles – sometimes with more, sometimes with less shares.
A fund manager deliberately chooses which funds should find space in his fund of funds – he invests actively. The aim of such an investment strategy is to achieve the highest income, also called returns, to achieve.
“The funds of funds do not live up to these expectations,” warns Niels Nauhauser from the Baden-Württemberg consumer center. Because the costs of many funds of funds are extremely high (see below).
What are the pros and cons of funds of funds?
The disadvantages clearly outweigh this. Because even the one advantage that fund of funds could theoretically still be granted – namely the broad diversification of risk – often turns out to be a mere marketing argument.
Yes: A fund that bundles many individual stocks, such as stocks, spreads the risk across several shoulders – and a fund that bundles many funds, in theory, spreads the risk even more broadly. But that’s not really necessary.
Broad diversification is also possible with ETFs
“In practical terms, there are also many index funds or equity funds that spread the risks extremely broadly and thus completely adequately,” says Nauhauser. Index funds are investment funds that replicate a stock index like the Dax as precisely as possible. If you can buy and sell them on the stock exchange, they are called “Exchange Traded Funds”, or ETFs for short.
Funds of funds therefore offer no real advantage, but they do have several disadvantages. On the one hand, higher costs for double fund management are eating away at the return. Doubly because you not only pay continuously for the management of the fund of funds, but also for the management of the individual funds it contains.
Fund managers are not omniscient
According to the consumer advice center, the costs – based on the managed fund assets – are often two percent and more. And that every year. That lets the return shrink a lot. For comparison: The running costs for ETFs are usually between 0.1 and 0.2 percent per year.
Another disadvantage from the point of view of consumer advocates is the active investment strategy. Because even if the costs weren’t so high, there would still be no guarantee that the promised high returns would actually be achieved. After all, nobody can reliably predict the performance of individual funds.
What do ETF funds of funds bring me?
In a nutshell: more comfort at higher costs, which are often not justified. An ETF fund of funds is the combination of both worlds, i.e. a fund that invests in several ETFs. It should relieve you of the work of having to select ETFs yourself, while maintaining low fund management prices. But the latter usually fails.
Although there are ETF funds of funds with costs of 0.5 percent, they are still higher than the costs of pure ETFs, which are often no more than 0.2 percent. Here you have to decide for yourself how much it is worth to you to have a finished portfolio in front of you.