Nakul Karnik, an IIM graduate and an analyst with a knowledge processing outsourcing unit, tracks the Middle East and North Africa (MENA) markets. He believes that there are strong growth opportunities there. Putting his money where his mouth is, Karnik has invested some of his savings in exchange-traded funds listed in the US. These funds track opportunities in the MENA markets and have made Karnik good money.
Unlike Karnik, not all investors have the resources to invest in global markets nor do they have access to US-listed exchange-traded funds. For such investors looking to diversify overseas, mutual funds provide the opportunity.
WHY INVEST OVERSEAS?
Investing abroad at a time when FIIs are pouring money in India may sound a bit odd. But there is a logic behind this. Given the impact that geo-political events have had on regional markets, diversification makes sense. Besides developed markets offer better avenues of investment.
For instance, opportunity to invest in a search engine, water resources, precious metals mining and clean energy can be easily tapped overseas. These investments are future growth opportunities but they are not available in India.
This diversification within and across asset classes improves the portfolio on the qualitative front. “Diversification of your assets overseas is a must for your portfolio. As a starting point, one could look at parking about 5-10% of one’s portfolio overseas.” Hrishikesh Parandekar, CEO, Karvy Private Wealth.
HOW TO INVEST
RBI permits individuals invest up to $200,000 per year. One can identify various themes or growth drivers before committing money. “GDP growth rates of countries can be an easy yardstick to identify opportunities worldwide, though they has to be seen in the light of other variables,” says Deepak Arackal, vice-president & quantitative investment manager, ING Investment Management India.
Themes such as global energy, global real estate and infrastructure in emerging economies are popular. The best way to tap these themes for the individual investors is mutual funds.
THE FUNDS
The funds operate on multiple models. The first is actively-managed portfolios from India, where the local fund managers buy and sell stocks in foreign markets. Templeton India Equity Income is one of the oldest schemes in this segment.
The second is the fund of funds model. The Indian fund manager invests the money in various funds listed overseas and actively monitors these investments. Quantitative and qualitative parameters are employed to take investment decisions. The third model is a feeder fund model and is a kind of fund of fund. Here the Indian fund invests in a fund listed overseas. Principal Global Opportunities Fund is one of the oldest offering here.
“A fund that offers exposure to markets that have low correlation with Indian markets makes a good option from the diversification point of view,” says Maju Nair, AV-P, Sharekhan. The investor should pick a fund that caters to his needs.
The arrangements of money management at the fund level need not influence the investors’ decision. “But given the taxation treatment, it makes sense to invest in a fund that invests at least 65% of assets in Indian equities and rest in foreign equity,” says an official with an Indian private banking set-up.
WHAT IS ON OFFER?
The Indian mutual fund offerings in this segment are primarily focused on emerging markets equity, energy and commodities worldwide. A look at the adjacent table will give you an idea of the returns generated by such schemes. But there is more to the story than just the returns.
Templeton India Equity Income, a scheme with the longest track record in this category, is managed by Mark Mobius along with Vikas Chiranwal. The scheme invests at least 65% of money in Indian equities and rest of the money is invested in some hand-picked equities across the world.
No wonder the scheme boasts of 14% returns since launch in April 2006 and assets of Rs 1,158.47 crore as on September 30, 2009. On the other hand, top performer, Mirae Asset Global Commodities Stocks Fund, posted 92% returns in one year and invests in the commodity stocks worldwide. The fund was launched in July 2008.
A look at the portfolios of the funds throws up some details of the opportunities the investors can tap. As on September 30, 2009, Reliance Natural Resources Fund had a small exposure to an ETF that invests in water resources, an otherwise difficult to invest theme for an Indian investor.
Sundaram BNP Paribas Global Advantage Fund, on the other hand, boasts of a portfolio comprising 11 fund holdings offering exposures across markets and asset classes. Birla Sunlife International Equity Fund offers two plans, one that invests 65% of the assets in Indian equity and rest overseas and the other that is allowed to invest its entire money in foreign equity.
RISKS
Like any other investments, risks follow returns. Risks related to the geo-political scenario in foreign lands is a key risk and many of us may not be able to read it clearly. “Multiple currency exposures also enhance risks and so is the case with regulatory environment that regulates transparency and compliance levels,” says the official with private banking set-up.
Those who are keen to invest overseas should understand that this may not be just one more vehicle to make more money. A look at the returns connote that many of the funds enlisted here have underperformed the Indian market indices. Hence, the qualitative value addition that bring to your portfolio should be given closer look than just the returns.
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