A Fund Of Funds Holds Shares Of Many Different Mut[1]
1. Indus Investment
Fund Of Fund
a fund of funds holds shares of many different mutual funds. These funds
were designed to achieve even greater diversification than traditional
mutual funds. On the downside, expense fees on fund of funds are typically
higher than those on regular funds because they include part of the
expense fees charged by the underlying funds. In addition, since a fund of
funds buys many different funds which themselves invest in many different
stock, it is possible for the fund of funds to own the same stock through
several different funds and it can be difficult to keep track of the overall
holdings.
Mutual Fund Share Classes
What It Is:
Some mutual funds offer different classes of shares to investors. Each share,
regardless of class, represents an investment in the fund. However, each class has
different fee structures and projected returns.
In general, mutual funds that charge loads may offer up to three classes of shares to
investors: class A, class B, and class C. Some funds also offer class I shares only to
institutional investors.
A shares charge a fee upon the investor’s purchase of fund shares. The fee is
expressed as a percentage of the amount invested and is referred to as a front-end
load.
B shares charge a fee upon the sale of fund shares. This fee is also expressed as a
percentage of the amount invested and may also be called a contingent deferred sales
charge, an exit fee, or a redemption charge. However, the fee is most commonly
referred to as a back-end load.
C shares spread the load throughout the investor’s ownership of the shares. The load
on C shares is generally lower than those charged by corresponding A and B shares,
but C shares typically have higher management expense ratios.
2. Class I shares are usually sold only to institutional investors, and they may carry unique
fees and expenses.
How It Works/Example:
The effects and timing of loads can have considerable impact on performance. For
example, let's assume you are interested in making a $10,000 investment in the
Company XYZ mutual fund, which has a 4% front-end load. Of the $10,000 investment,
$400 ($10,000 x .04) goes to the fund company and $9,600 is actually invested in the
fund as a result. Ideally, the earnings from the investment should more than make up for
the front-end load. In this example, the front-end loaded fund (A shares) must return
14.6% in one year to reach $11,000 in value, but the no-load fund must only return 10%
to do so. If you were to purchase B shares, which have a 4% back-end load, you must
instead pay a $400 fee upon the sale of the investment ($10,000 x .04). Again, the
earnings from the investment should more than make up for the back-end load. In this
example, the back-end loaded fund must therefore return 14% in one year to reach
$11,000 in value after the fee, but the no-load fund must only return 10% to do so.
Front-end loads vary widely and may apply to reinvestments of dividends, interest, or
capital gains. Frequently, investors are able to pay a reduced load if they make large
investments. The amount that qualifies for a reduced load is called the breakpoint and
varies from investment to investment. Some funds have more than one breakpoint. In
some cases, an investor can sign a letter of intent with the investment company,
promising to invest a certain amount over time in order to qualify for the reduced load
now. Additionally, some investments provide for a right of accumulation, which grants a
lower load when the investment reaches a certain level over a certain period.
Fund companies commonly assess back-end loads on the beginning value of the
investment, although some companies calculate the fee on the ending value if the price
is lower than the original purchase price. Generally, fund companies reduce back-end
loads for each year the investor holds the investment. If the investor holds the
investment long enough, many fund companies waive the back-end fee. For example, a
back-end fee might be 5% in the first year, 4% in the second year, and so forth until the
fee is zero.
Why It Matters:
A multiclass mutual fund structure lets investors choose the fee and expense structure
that is most appropriate for their investment goals. However, it is important to
understand that overall, loads discourage investors from frequently trading their mutual
fund shares, an activity that would require funds to have considerable amounts of
cash-on-hand rather than invested. Generally, however, a load is considered payment
for the broker's expertise in selecting the right fund for the investor. Notably, there is
considerable controversy about how different types of loads affect a fund’s overall
performance.
3. Loads are most often associated with mutual funds, but annuities, life insurance
policies, and limited partnerships may also have loads. Mutual funds must disclose
loads and other fees in one or more prospectuses, and it is important to understand that
loads are only one of several types of fees that may be charged. Thus, when comparing
funds, investors should be careful to evaluate all fees associated with an investment
and its available share classes. Additionally, investors and advisers should always
consider the nature of the investment, the investor's risk tolerance, and the investor's
time horizon when evaluating any investment.
Multi-manager funds give investors access to more than one fund manager or unit trust.
The premise is simple: why tie up performance with one investment house manager,
when you can have access to a dozen fund managers from a range of investment
houses?
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The marketing pitch concentrates on the benefits of diversification. But Mark Dampier,
the head of research at Hargreaves Lansdown, is sceptical.
quot;Fidelity is joining a very competitive market,quot; he says. quot;It's already becoming
oversaturated. There are too many offerings and it's too confusing for investors. They
are seen as a safety play, but investors and advisers still have to do the basic research
because they're not all the same.quot;
Investors have had their fingers burned over the past three years by buying heavily into
single-sector funds such as technology, says Fidelity. What they really need now is a
diversified portfolio that balances risk and reward.
Fidelity's move is seen by some as a sign that what was a fad should now be taken
seriously. The trend, followed not only by fund managers but also by banks, is scarcely
surprising given the abysmal performance of individual fund management groups over
the past three years.
It is, after all, rare to find a company whose own fund range is brimming with top
performers - although Fidelity is one of the few exceptions.
quot;The move into the multi-manager sector is a major strategic initiative for us,quot; says
Richard Wastcoat, the managing director of Fidelity Investments.
quot;We think the fund of funds concept will grow in popularity in this country as investors
seek greater diversification.quot;
Wastcoat predicts that multi-managers will account for a sizeable proportion of the UK
funds market in the next five years as investment companies respond to the needs of
financial advisers.
4. According to the Frank Russell Company, which specialises in multi-managers, four in
five independent financial advisers have indicated a desire to recommend
multi-manager products to their clients. It saves them time and, given that many are not
investment specialists, it allows them to put fund choices into the hands of an expert.
When fund managers jump ship for instance, as they frequently do, advisers do not
have to worry about whether to tell clients to sell or hold the fund because the manager
running the multi-manager fund will make the decision for them.
Cerulli Associates, the US-based financial analysis group, predicts that the amount
invested by UK investors in multi-manager funds will double from £12 billion to £24
billion within the next five years. If that's the case, it is not surprising that so many British
investment companies are looking to get in on the act
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