Investment in Fund of Funds
If each normal investment fund invests in underlying assets directly, the fund of funds is investing solely in other funds that invest directly in shares, bonds or other assets.
If such funds distributors would argue that fund of funds has a very good diversification – that would be a true, but they are unlikely to declare, that all investment funds are broadly diversified enough, and every investor can easily purchase several different funds that he likes by himself, instead of investing in one fund of funds.
The largest disadvantage of these funds is that they are investing in funds, that all has their own management and other fees, and after that fund of funds charge investors by additional management fee.
Therefore, a fund of funds will only rarely be the best choice, and investors would be better to choose investment funds that invest in securities directly.
Fund of funds are not difficult to be designed, as well as their management is very simple, requiring much less work than actively managed mutual funds where analyzing and tracking securities takes a lot of work resources. Still fund of funds is convenient product for Management Company: you take regular fees (revenue for them) for little of work and sell it as a good think for beginners.