What is a source of funds?

Answer 1

Funds of Funds

A fund of funds represents a mutual fund that invests in other mutual funds. One of the best examples of this type of investment style is the target date fund.

These types of funds are designed to provide a broad based diversification. In target date funds, the portfolio of underlying funds allows the fund manager to shift investments as the fund nears its target date. In a target date fund, a date in the future is selected by the investor that often relates to the year in which they would like to retire. The fund manager shifts the portfolio from aggressive investments to more conservative ones over time.

There are certain things an investor should consider before investing in this type of fund. One, the cost of owning these funds may be higher. These additional fees can be found in the prospectus under "Acquired fund fees and expenses" and should be added into the other fees the fund charges. Two, you must rely on the fund manager to achieve the diversity you want and allocate the assets accordingly. Three, these types of investments may be focused on matching the comparable benchmark rather than beating it.

Carefully read the prospectus before investing, understand your risk tolerance and consider other opportunities such as index funds to meet your goals.