What is a feeder fund?
POSTED ON May 13, 2019
What if we told you there was a way for you to save and invest your money automatically? Enter feeder funds.
There are two reasons why they are called feeder funds:
- The money you invest are “fed” into bigger funds.
- You “feed” the fund with money every month for a certain length of time called a build-up period.
As you might know, Unit Investment Trust Funds or UITFs let you put your money in assets and by splitting up the cost and ownership into units.
Instead of putting your money in assets, a feeder fund puts your money put in a bigger fund.
How do they work?
Let us say there is a fund you want to put your money in – Fund A. The minimum investment in this fund is P25,000. If you want to take things a bit more slowly, you can put your money in its feeder fund, if one is available.
Instead of putting in the P25,000 at once, a feeder fund allows you to make an initial subscription of P5,000 at first, and then you put in P1,000 every month. It’s like investing in installments.
The fund manager of the Fund A Feeder uses your money to buy units in Fund A. So, when Fund A grows, so does Fund A Feeder.
What are the advantages of feeder funds?
A feeder fund has advantages and disadvantages. One clear advantage is the lower minimum investment. Instead of one big cash-in, you can do it one little at a time. This is a good way to save automatically. They also have lower fees compared to UITFs.
The disadvantage of feeder funds is that they’re not available for all UITFs. Another disadvantage is you won’t be able to time your investments. This means you can’t choose when to invest and when not to invest because you have to put in the money regularly.
Feeder funds in summary
Feeder funds are UITFs that are more accessible while letting you set up a way to save and invest without effort. They have lower minimum investment and top up requirements and they have lower fees as well.