What Is a Fund of Funds (FoF)?

A fund of funds (FoF), in Turkish fon sepeti fonu (FSF), is a type of investment fund that holds at least 80% of its portfolio in the participation units of other investment funds and exchange-traded funds (ETFs). Instead of buying individual stocks, bonds or similar securities directly, it holds other funds together. In Turkey these funds are established under the Capital Markets Board (SPK) Communiqué III-52.1 ("Principles Regarding Investment Funds") and are bought and sold through TEFAS. Because of this feature it is also called a "fund of funds."

How does a fund of funds work?

A normal investment fund invests money directly in securities: stocks, bonds, repo, precious metals and the like. A fund of funds instead holds these instruments indirectly, through other funds. Under the communiqué at least 80% of the portfolio must consist of the participation units of other funds and ETFs; this 80% minimum is the defining threshold that makes it a "fund basket." The remainder may be kept in cash, deposit-like instruments or money-market instruments.

This structure gives the investor access to many funds in a single product — a form of diversification. A basket spread across different strategies, asset classes or portfolio managers can be reached by buying one participation unit. Because the funds it holds can include exchange-traded funds, a FoF can also carry indirect exchange traded fund positions.

Difference from an umbrella fund

A fund of funds should not be confused with an umbrella fund. An umbrella fund is an administrative and legal shell under which several sub-funds (money market, equity, debt instruments, etc.) are issued; it is not itself a product you invest in directly. A fund of funds, by contrast, is a real product that actually invests in other funds and whose participation units the investor buys. Technically funds of funds are also issued under a "fund-basket umbrella fund," but the "basket" logic — holding other funds together — is different from the umbrella's purely administrative grouping. Likewise, a variable (flexible) fund that freely spreads its portfolio across securities directly holds the instruments themselves, not other funds.

Structure	What it holds	Invested in directly?
Normal investment fund	Securities directly (stocks, bonds, repo)	Yes
Fund of funds	Units of other funds and ETFs	Yes
Umbrella fund	Its sub-funds (administrative shell)	No, you invest in the sub-fund

Two-layer cost

The most notable feature of a fund of funds is its cost structure. The investor pays expenses in two separate layers:

• The fund of funds' own management fee and total expense ratio,
• The management fees and expenses of the underlying funds it holds.

So the true cost is not limited to the expense ratio the top fund discloses; the underlying funds' expenses are also passed on to the investor indirectly. To assess the total burden you should look at both the total expense ratio and the management fee across both layers. The maximum expense ratios of investment funds are capped by SPK per fund type; the point to note for a fund of funds is that this cap does not include the underlying funds' expenses.

SPK portfolio limits and examples

Communiqué III-52.1 sets limits to secure diversification: no more than a certain share of the fund's total value may be invested in a single underlying fund, and no more than a certain share of a single fund's issued units may be held. These limits aim to prevent a fund of funds from concentrating excessively in one product. In practice, examples such as a "silver fund basket" or precious-metal-themed fund baskets bring several funds together around a specific theme.

A fund of funds is not investment advice; it does not indicate which fund is "good," it only describes a way of packaging several funds into a single product. You can review different funds' expense ratios and contents through /fon-karsilastirma and judge the total effect of the two-layer cost for yourself.