A small exposure will ensure that there is adequate hedge when the equity market is not doing too well
If you have not taken notice of a slew of feeder funds in the market, it is time you did. They've clocked impressive returns during the current uptrend and provided diversification.Feeder funds became popular lately, with many international funds making a debut here.
Concept: Feeder funds invest via another fund called the master fund. Often, an onshore feeder fund will invest in an offshore master fund. This is done so that the foreign master fund can gain a tax advantage for domestic investors.
Feeder funds are a bit complex since they bring exchange rates into play. But, the investor remains unaware of such intricacies. These funds are launched to replenish or expand the asset base of a principal fund.
Existing feeder funds: Currently, there are 22 schemes floating, across domestic mutual funds. The popular ones being, AIG World Gold Fund, DSPBR World Gold Fund, ING Latin America Equity, HSBC Emerging Equity Funds and DWS Global Thematic Offshore.
While Sensex and Nifty gave 12.8 per cent and 14.79 per cent, respectively, over a six-month period, some of these offshore investments have given more. The global markets, have provided more than decent returns, even if emerging markets have won hands down.
Benchmark Asset Management recently launched India's first international exchange-traded fund (ETF) linked to Hong Kong's stock market index, Hang Seng. HSBC Mutual Fund has sought the Securities and Exchange Board of India’s (Sebi) nod for a scheme that invests in a Brazilian fund.
Also Read
The popularity index indicates there are more investors willing to invest in commodity-based offshore funds and emerging market funds. Reason: Commodities tend to outperform significantly during their market cycle and Indian investors tend to be drawn more towards returns and less towards asset allocation/diversification.
| Fund | Expense Ratio (%) |
| AIG India Equity Reg | 2.31 |
| AIG World Gold | 0.75 |
| DSPBR Equity | 1.87 |
| DSPBR World Gold Reg | 0.58 |
| ICICI Prudential Discovery | 2.00 |
| ICICI Prudential Indo Asia Equity | 2.29 |
| Kotak 30 | 2.04 |
| Kotak Indo World Infrastructure | 2.00 |
Taxation: Given that the underlying transactions of these funds are not subject to securities transaction tax, 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.
Cost: 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 is no conclusive inference.
There would be expenses of the original (offshore) fund. That’s why funds like the World Gold Fund have a lower cost structure which would eventually work out to FMC of about 2-2.5 per cent. So, keep a tab on the charges of the original fund.
| Returns (%) | |||
Opportunities
Asia Equity
Infrastructure
Suitability Analysis: It is important to ensure this portion on your portfolio does not get too huge to stomach. Gold mining funds have remained popular over the years. The uptrend in gold has attracted many investors with growing awareness of the benefits.
Emerging markets are another theme which could be rewarding in the medium- to long-term. In fact, even during turbulent times, these funds have held their grit.
It is, however, important to understand they may not always outperform the regular equity diversified funds, which can be easily benchmarked against Indian indices. Global funds behave differently: One has to hold their act together when things look shaky. A 5-10 per cent exposure to such funds in your portfolio could be interesting and a well-thought out diversification.
While feeder funds are doing this, why not take a nice ride?
The writer is CEO, Right Horizons