A feeder fund conducts virtually all its investing through another fund called the master fund. In other words, the feeder fund is a mutual fund that uses its assets to invest in another mutual fund. This is similar to a fund-of-funds arrangement, except that the master fund manager is responsible for managing the underlying investments.
Feeder funds are usually launched to expand the asset base of a principal fund. This enables the fund marketers to collect money from different markets.
Advantages
They provide access to different asset classes across markets by making available the expertise that may not be otherwise available. For example, Principal Global Opportunities makes it possible for Indian investors to access global capital markets without building up a team in India to manage a fund targeting global opportunities.
Sometimes they are located such that they benefit from favourable tax regulations. This can enhance the return generated by the master fund.
The Tax Angle
Given that the underlying transactions of these funds are not subject to securities transaction tax (STT), they are not treated at par with the domestic funds. The short-term capital gains tax (for holding period of less than 12-month) is 30 per cent. And the long-term capital gains tax (for holding more than 12 month) is 20 per cent post indexation.
Watch out for costs
Feeder funds do not charge entry load. But there are other costs attached like fund management cost. (See the table to know the expense ratio of various funds)
There would be additional expenses of the original (offshore) fund. Typically, the feeder fund would keep a low expense ratio. That’s why funds like the AIG World Gold Fund have a lower cost structure which would eventually work out to fund management cost of about 2-2.5 per cent.
Not yet popular
‘Feeder funds’ that invest overseas have not gained much popularity despite RBI liberalising norms for overseas investing. Such funds that collect money from Indian investors to deploy it in funds overseas managed total assets of just Rs. 1,350 crore in Sept, 2010 - a fraction of the total assets of Rs 219,691 crore managed by all equity funds.
Performance
It is a little early in the day to make a definitive judgment about their performance as most of them have been launched in the 1-2 years. An analysis of the 1-year returns shows that AIG World Gold Fund and DSPBR World Gold Fund have delivered good returns with the rest disappointing in terms of returns.
Overview:
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Performance (%) |
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|
Scheme Name |
6 Months |
1 Year |
Expense Ratio (%) |
Total AUM (Cr.) |
|
AIG World Gold (G) |
33.07 |
24.25 |
0.75 |
128 |
|
DSPBR World Gold - Regular (G) |
47.45 |
18.33 |
0.65 |
805 |
|
DWS Global Agribusiness Offshore(G) |
NA |
NA |
0.75 |
26 |
|
HSBC Emerging Markets (G) |
31.8 |
7.37 |
0.77 |
47 |
|
ING Global Real Estate - Regular (G) |
18.61 |
8.18 |
0.75 |
69 |
|
ING Latin America Equity (G) |
28.45 |
10.49 |
0.75 |
28 |
|
JPMorgan JF Gr China Equity Off-Shore (G) |
44.3 |
11.9 |
0.6 |
72 |
|
Kotak Global Emerging Market (G) |
30.33 |
11.16 |
0.76 |
109 |
|
Mirae Asset China Advantage - Regular (G) |
64.4 |
15.68 |
0.75 |
16 |
|
Principal Global Opportunities (G) |
34.46 |
12.07 |
0.42 |
48 |
|
NA - Not available |
Source : Accord Fintech |
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As on 13-Nov-2010 |
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Advantages:
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Provide diversification.
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Provide access to markets and asset classes that may be inaccessible easily.
Disadvantages:
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Feeder funds have an additional exchange rate risk.
Cafemutual recommends:
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Use feeder funds carefully and selectively to help your clients diversify.
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Ensure that the long term prospects of the assets and markets targeted by the fund hold potential.
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Invest only in funds with a minimum track record of 3 years.