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A feeder fund may be an equity or debt mutual fund that pools money from investors and invests it in a master fund. This is one of the most unique investment structures that investors may come across.
In this story, we will explain feeder funds in a simple way by explaining how it works, the difference in the master-feeder relationship, and how you can invest in the best feeder fund in India using Cube Wealth.
A feeder fund follows a bottom-up; two-tier structure:
Investors pool their capital into a feeder fund that transfers or invests the capital in a bigger fund known as the master fund. The feeder fund will not invest your money in any debt or equity instrument.
Capital collected from the feeder fund will be deposited into the master fund. The fund manager will invest the capital into various securities like equity and debt.
The two-tier structure between the feeder and master fund leads to lower investment costs for the investor and lower operating costs for the Asset Management Company.
Moreover, it gives the master fund access to a bigger pool of capital that can allow the fund manager to invest in more securities and generate better returns.
In simple words, a feeder fund invests in master funds. It transfers money to a master fund and is not actually allowed to invest in any security.
The master fund, on the other hand, will use the pool of money collected from its branch of feeder funds to buy securities and generate returns.
A feeder fund may be associated with more than one master fund. Similarly, the master fund may have more than one feeder fund associated with it.
Investors don’t have to pay any fees associated with the master fund. Instead, they’ll have to pay an expense ratio as per the feeder fund they invest in.
The NAV of a feeder fund may be different from another feeder fund investing in the same master fund.
The returns generated by the master fund will be distributed across all the feeder funds based on the weight of their investment. The feeder funds do not generate returns on their own.
The feeder fund and master fund need not be located in the same country or continent. For example, a feeder fund in India is allowed to invest in a master fund located in the US or China.
The geographical structure of feeder funds has one crucial benefit - you can reap the rewards of international debt & equities that the master fund invests in while paying taxes on the feeder fund located in India.
Feeder funds can be associated with master funds regardless of similarities in investment goals and objectives. However, feeder-master funds may benefit from sharing the same investment objectives and goals.
Both equity and debt feeder funds are treated as debt funds during taxation. Investors at a higher tax slab may thus have to consult a wealth coach to know if feeder funds may suit their goals.
An expense ratio is a fee you have to pay for the fund manager’s active involvement in the fund. Higher expense ratios can eat into your profits.
Feeder funds generally invest in master funds that are located in other countries. Hence, there is a certain amount of risk that you must weigh to understand if feeder funds can add value to your portfolio.
Download the Cube Wealth app to take an in-depth risk analysis quiz.
Feeder funds may be suitable for the long term given the short term volatility that they might experience due to the nature of their investment.
Thus, you must consult a Cube Wealth Coach to know if feeder funds can help you achieve your investment goals.
The Cube Wealth app gives you access to the best feeder fund hand-picked by our mutual fund advisor, Wealth First. You can invest in the feeder fund in one-go via a lump sum investment or you can start a Systematic Investment Plan.
Furthermore, Cube Wealth simplifies SIPs with these features:
Download the Cube Wealth app to invest in the best international and global mutual funds.
*Note: Facts & figures are as of 04-02-2021. The above-mentioned data comprise of publicly available information from Google. Download the Cube Wealth app for the latest information.
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