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Tata Mutual Fund proposes semiconductor fund of funds

By Munikoti Rochan

13:59, 25 November 2021

A financial concept about mutual funds.
TATA MF targets a new investment concept – Photo: Shutterstock

India’s Tata Mutual Fund (MF) has filed draft papers for a global semiconductor fund of funds (FoF) that will invest in global mutual funds that target microchips and allied industries.

The asset manager's move treads on the heels of a worldwide short-supply of semiconductors.

For now, Tata MF has shortlisted the iShares Semiconductor exchange-traded fund (ETF), the iShares MSCI Global Semiconductors UCITS ETF, the VanEck Semiconductor ETF, the SPDR S&P Semiconductor ETF and the Fidelity Select Semiconductors Fund for investment.

These funds have exposure to US, Dutch, Taiwanese, Israeli and Swiss companies that design, manufacture and distribute semiconductors. For instance, Nvidia Corp, Intel, Qualcomm, ASML Holding and the Taiwan Semiconductor Manufacturing Company (TSMC).

Tata MF, in the 24 November draft fund document filed with India's markets regulator, has cautioned investors that “their principal will be at very hight risk”.

Tiny chips power nearly everything

The worldwide shortages of semiconductors, which surfaced in the early 2021, has highlighted the fragility of global supply chains, which largely relied on Asia as a hub of semiconductor manufacturing. The issue had major implications, representing a threat for buyers and a significant opportunity for suppliers.

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The increasing sophistication of automobiles and consumer durables means microchips are in ever greater demand.

In cars, chips are inserted into digital-instrument gauges, anti-lock braking systems and parking sensors, among other systems. Elsewhere, tiny silicon chips are deployed in everyday items like washing machines, laptops and smartphones.

While chip utilisation has remained high over the past two decades, semiconductor capacity in Asia has increased by an average of 4% annually, McKinsey & Company wrote in an article on 27 May. Meanwhile, coronavirus-induced lockdowns boosted demand by increasing the use of internet-based and automation technologies, consultancy group KPMG noted.

Previously, in 2019, the roll-out of fifth generation (5G) technology for broadband internet and mobile telephony had triggered an increased demand for semiconductors.

Read more: ASML stock forecast: Can supply keep up with demand for semiconductors?

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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