Scenario 22: What is the benefit of investing in a 'fund of funds'?

Question: Scenario 22: What is the benefit of investing in a 'fund of funds'?

Answer options:

• It eliminates all investment risk. ✅ It provides an extra layer of diversification by investing in other mutual funds.
• It always has lower MERs than traditional mutual funds.
• It guarantees access to proprietary investment strategies.

Correct answer: It provides an extra layer of diversification by investing in other mutual funds.

Explanation: A fund of funds invests in other mutual funds, providing an additional layer of diversification across multiple investment strategies and fund managers. While it doesn't eliminate risk, it can broaden exposure. MERs can sometimes be higher due to the layering of fees. The correct answer is "It provides an extra layer of diversification by investing in other mutual funds.". This capacity-fill scenario 22 reinforces the same competency for the ific bank and follows the certified explanation standard.