New Here? Get the Free Newsletter

Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning. Join over 21,000 email subscribers:

Articles are published Monday and Friday. You can unsubscribe at any time.

Funds of Funds: Higher Expenses Means Trouble

Given that there are currently more mutual funds than there are stocks of actual companies, it’s no surprise that some ivestment managers have decided to make a living by creating portfolios of funds rather than stocks.

Funds like this have historically shown to have an even lower chance of beating the market than other actively-managed funds. Why? Two layers of expenses. (To pay for both the underlying funds as well as the fund whose job it is to choose among them.)

Grand total costs of these actively-managed portfolios of other actively-managed funds often approach 3%. That’s a big portion of return that they’re eating.

Passively-managed funds of funds

Other funds of funds are simply passively-managed portfolios of funds run by the same company. They own shares of their own company’s funds, and buy/sell them at predetermined times (to maintain a given asset allocation, for instance.) The most common funds in this category are the “target retirement” funds.

Many of these funds are acceptable choices, because the only expenses being charged are the expenses for the underlying funds. (And this makes sense given that these funds only invest in funds run by their own company, so there should already be a built-in profit margin.)

Unfortunately, however, several target retirement funds do actually charge an extra level of expenses. In this scenario, you’re essentially getting the same funds that would be available to you anyway, but you’re paying more money for them than you need to.

Overall lesson: Before investing in a fund, be sure to take the time to actually read its prospectus (or, at least, the part of it that describes the investment costs). It’s important to at least know what you’re paying.

New to Investing? See My Related Book:

Book6FrontCoverTiltedBlue

Investing Made Simple: Investing in Index Funds Explained in 100 Pages or Less

Topics Covered in the Book:
  • Asset Allocation: Why it's so important, and how to determine your own,
  • How to to pick winning mutual funds,
  • Roth IRA vs. traditional IRA vs. 401(k),
  • Click here to see the full list.

A Testimonial:

"A wonderful book that tells its readers, with simple logical explanations, our Boglehead Philosophy for successful investing." - Taylor Larimore, author of The Bogleheads' Guide to Investing
Disclaimer: By using this site, you explicitly agree to its Terms of Use and agree not to hold Simple Subjects, LLC or any of its members liable in any way for damages arising from decisions you make based on the information made available on this site. I am not a financial or investment advisor, and the information on this site is for informational and entertainment purposes only and does not constitute financial advice.

Copyright 2020 Simple Subjects, LLC - All rights reserved. To be clear: This means that, aside from small quotations, the material on this site may not be republished elsewhere without my express permission. Terms of Use and Privacy Policy

My new Social Security calculator: Open Social Security