By Alex Williams

If you haven't heard of a fund of funds, you might think it is just a redundancy. The truth is a fund of funds has some important advantages and disadvantages that you need to be aware of. A fund of funds is exactly what it sounds like. It is a mutual fund that invests in other mutual funds. At first it may seem silly to you, but here are some big advantages to investing in a fund of funds:

Double Diversification -A mutual fund diversifies across many different stocks. A fund of funds diversifies amongst many different funds.

Simplicity -Instead of investing in many different funds to achieve the same result, you can just invest in one fund. This allows for much less paperwork.

Cheap for Beginning Investors -It is tough to diversify when starting out because of account minimums. A fund of funds allows for an investor to diversify amongst hundreds or thousands of stocks in one small account.

Institutional Advantages -Funds of funds can often invest in desirable institutional funds that are off-limits for retail investors. They also have the ability to invest in some load funds without paying the load.

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Comparison between Mutual Funds and Stocks

Diversification

Mutual fund companies invest in a variety of stocks, bonds, and money-market investments, so mutual funds carry much lower risk than stocks.

Professional Management

Mutual funds enable investors to pool their money and place it under professional investment management. These managers have been around the industry for a long time and have the academic credentials to back it up.

Greater Upside Potential

Individual stocks have a greater upside potential than most mutual funds. Fluctuation in stocks is greater than mutual funds, so you have greater chance to earn more return.

Risk and Return

In general, Risk and return depend each other, the greater the risk, the higher the potential return; the lower the risk, the lower the expected return. Mutual funds try to reduce their risk by investing in a diversified group of individual stocks, bonds, or other securities.

Efficiency

Mutual funds have large sums of money to invest and often they trade commission-free and have personal contacts at the brokerage firms.

Conclusion

By investing in stocks you can get more return than mutual funds but, by investing in mutual funds your risk is lower. Mutual funds are great for funding retirement plans and investors that don't have the time or energy to consider individual stocks.

It is noticeable that most expert traders in stock market invest in mutual funds too. I recommend investing in both of mutual funds and stocks but, if you have experience, time and energy you can invest most of your money in individual stocks.

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