Fund of Funds

As its name suggests, a fund of funds (FOF) invests in other mutual funds instead of individual securities. With an emphasis on diversification, FOFs are designed to simplify investing even more than a traditional mutual fund. For example, a number of FOFs invest in both stock and bond funds, with the proportion depending on the manager's investment objectives.

Another potential benefit is that while they aim to reduce risk by enhancing diversification, they don't significantly lower the potential for returns. The primary drawback is that the fees are typically higher than if you bought each of the component funds on your own. The extra money covers FOF administrative costs.

Though most investment companies populate their FOFs with individual funds from their fund family, some companies add mutual funds or exchange traded funds (ETFs) from other investment companies.

Diversification does not assure a profit, or protect against loss, in a down market.

Investors should consider the investment objectives, risks, charges, and expenses of a mutual fund or Exchange-Traded Fund (ETF) carefully before investing. A prospectus contains this and other information. A mutual fund prospectus is available through or through a Scottrade branch office. An ETF prospectus can be obtained directly from the issuer. The prospectus should be read carefully before investing.