International Feeder Funds offer a diversification tool which can be added to your investment Portfolio for more balanced returns.
Let’s understand the concept of feeder funds, before we delve into their International feeder funds.
What are Feeder Funds?
Feeder Funds are those funds which feed the pooled investor money into another Master Fund which carries out the investing and trading activities. The trading or investment profits derived by Master Fund on behalf of feeder fund are divided on a
pro-rata basis depending on the proportion of such investments. Various fees and charges are also paid at the feeder fund’s level.
What are International Feeder Funds?
Feeder Funds which gather investor’s money to invest predominantly in overseas fund to take advantage of investment opportunities in those markets are called International Feeder Funds. These funds enables local investors access to international offshore funds with varied investment and portfolio management strategies.
What are the features and benefits of International Feeder Funds?
Geographical Diversification: Feeder funds which feed into Offshore Funds offer unparalleled diversification tool to expand investment horizon beyond local markets. Often due to various reasons local markets may or may not offer attractive returns to investors. Such investors tend to benefit by investing in markets which offer higher potential returns.
Economies of Scale across multiple markets: Managing offshore portfolios needs local expertise, knowledge and involves several other overheads, including creating offshore entities, securing Trading licenses, employees etc. These establishment and other costs, are mitigated by feeder funds by using the Master Fund/Offshore Fund route which enables pooling of resources to reduce costs and provides efficiency. These efficiency enables economies of scale by allowing international transactions to be conducted at nominal costs without creating the need of establishing own proprietary desk in such locations.
Benefits from Currency Hedging: The International feeder funds structure provides multiple hedging and arbitrage opportunities to investors seeking higher returns or safe bet against currency fluctuations. Though the quantum of such opportunities are fairly limited and often erased due to time zone differences during trading sessions. Often feeder funds can be utilised to take advantage of depreciation of local currency to Offshore Feeder’s base Currency. Investors can benefit from arbitrage opportunities that arise on account of such appreciation of Offshore Feeder’s base currency. Due caution needs to be taken into account while dealing in such transactions due to risks associated with the same.
Australian investors investing in US Offshore feeders can benefit from appreciating US Dollar (USD) v/s Australian Dollar (AUD).
Indian investors investing in US Offshore feeders can benefit from appreciating US Dollar (USD) v/s Indian Rupee (INR).
Risk mitigation of large investments in local markets alone: Often investors who have large exposure to domestic markets alone tend to have unbalanced portfolios during times when those markets under-perform due to various issues like growth, inflation, business cycle changes, political changes etc.
When should you invest in International Feeder Funds?
Usually there exists no thumb rule for right or wrong time to invest in markets. However, investments in such mutual funds should be done only after you have diversified adequately across domestic markets. The basket has different assets and different classes which adequately provide support in times of distress. Usually, when the local currency is appreciating is also a suitable time to begin such investments. In due course the portfolio would gain value in future, when the offshore currency depreciates.
What are the various taxation matters that should be considered while investing in International Feeder Funds?
Each country has various taxation models developed which needs to be considered while in making such investments. Varied tax definitions and accounting treatments to these complex structures have to be given due importance.