A fund can be fettered or unfettered. A fettered fund of funds is one that invests only in the funds of the investment house providing it. This can be an advantage when a house has a number of well-performing funds, as it will give the investor access to a number of these funds through just one vehicle.

Unfettered funds have been gaining a great deal of popularity over recent years. They collect the best of the funds in a specialist area into one overall fund, so you might, for example, buy a UK fund of funds, or a North American fund of funds and so on.

The fact that all the funds within a fund of funds are constantly monitored and managed by an experienced fund manager is one of the chief plus points of this type of product. The manager running the fund is watching the markets and the performance of the funds both within and outside the portfolio all the time.

Charges

Multi-manger funds can be expensive because each fund of funds must pay manager charges for each fund it holds. It will also levy management charges to its own investors on top of that.

Total expense ratios, or TERs, are a clever way of figuring out how much a fund is really costing. Rather than basing your judgement purely on the management charge, a TER enables the investor to take into account all the expenses in a fund, because it is a calculation of all the charges that fund might incur, including trading costs, stamp duty on equities and - the part relevant to funds of funds - management charges levied from other investment houses for their fund to be used.

But fund of funds managers, with their bulk buying power, are able to make deals with other fund management companies to avoid charges mounting up.