Feeder Fund

Have you heard of the term feeder fund? If yes, do you really know what it is?

Basically, it is a kind of mutual fund.

According to Investopedia,

“A feeder fund is one of a number of funds that all put investment capital into an overarching umbrella fund that is called the master fund, for which one investment advisor handles all portfolio investments and trading. The two-tiered investment structure of a feeder fund and a master fund is commonly used by hedge funds as a means of assembling a larger portfolio account by pooling investment capital. Profits from the master fund are then split, or distributed, proportionately to the feeder funds based on the percentage of investment capital they have contributed to the master fund.

(Investopedia Definition Link)”

In short, a feeder fund feeds the invested money to a target fund (aka master fund).

Why feeder fund?

First, it offers an access to foreign funds which are not easily accessible in Malaysia. Furthermore, the fund houses would have screened through the funds and offer target funds with high potential. The returns of the feeder fund also mimic the performance of target fund, with a few percentages difference.

Drawbacks

While investing in a feeder fund, we might face additional risk in certain cases due to the complexity of the target fund. There are some elements that might be foreign to us and these can constitute risk. The fee may be higher too due to the involvement of two parties. Nonetheless, the fund managers may get a discount in fees from the target fund and this will lower the costs.

Verdict

So is it worthwhile to invest in a feeder fund? If we cannot invest in the target fund directly and the returns are spectacular, the answer is yes. Nonetheless, we should pay attention to the fee structure to ensure that we are not being overcharged. If there is an equally good local mutual fund with the same investment strategy, the local fund might be a better choice.