A feeder fund is a one-of-a-kind investment vehicle that does not make direct investments. This is a type of mutual fund that invests in debt or equity securities. It is a pool of money that generates capital for master funds. This fund gains its capital from feeder funds which are then invested in the market, build a portfolio, or engage in trading operations. Feeder funds can allocate capital to as many master funds as they can. Hedge funds use a similar bottom-up strategy to build a larger portfolio.
Why feeder funds?
One of the most significant advantages of feeder funds is the reduction in operational costs. Because a master fund has a huge investment pool, it can simply build a larger portfolio, lowering operational costs and achieving economies of scale.
Structure of feeder funds
A two-tier method is used for feeder and master funds. Feeder funds pull money from direct investors and invest it in several master funds or a single one. Fees for fund management are assessed at the feeder fund level. Fees are determined by the expense ratio of the master funds in which they are invested.
The feeder and master funds don’t have to be in the same geographical location. A feeder fund can also invest in a US-based master fund. By investing in an Indian feeder fund, the eliminated geographical barrier can reap numerous benefits by receiving the returns of investing in international loans and stocks.
The master fund, like the feeder fund, may collect money from a variety of sources and put it into an investment portfolio. Profits are allocated to feeder funds based on their investment weightage. It is not required that all master funds in which a feeder invests have the same expense ratio or Net Asset Values.
Factors to consider while investing in a feeder fund
- Select a fund that invests in multiple master funds with similar investment goals.
- Find a fund that has management fees payment structure at the feeder fund level.
- A fund that invests in foreign master funds is beneficial as they allow you to invest in foreign markets without much friction.
To recapitulate, feeder funds are a type of mutual fund that does not earn any money directly but invests in master funds to achieve greater returns.
