What is described by the term “fund of funds”?

A "fund of funds" is specifically defined as a mutual fund that invests in other mutual funds rather than directly in stocks, bonds, or other securities. This structure enables investors to achieve broader diversification across various asset classes and strategies, thereby potentially reducing overall risk in their investment portfolios. By pooling capital to invest in multiple underlying funds, it allows investors to benefit from the expertise and strategies of professional fund managers across different segments of the market.

This option highlights a key feature of mutual fund investments, which is the focus on diversification and professional management. Since the fund of funds invests in a variety of mutual funds, it may access different investment strategies and sectors, enhancing its potential for returns while managing volatility.

Other choices contain characteristics that do not align with the common understanding of a “fund of funds.” For instance, a fund that invests solely in real estate would be categorized as a real estate mutual fund, while a fund that provides loans to other funds would denote a different financial structure altogether. Lastly, a fund exclusively available to accredited investors is not indicative of the fund of funds model, as such funds can be accessible to a broader range of investors, depending on the specific regulations in place.