Invest a small part of portfolio

Newspaper reports on the commodity rally made Shyam Shukla curious about international mutual fund schemes. The impressive returns in the last six months — higher than the Bombay Stock Exchange Sensitive Index, or Sensex — are also on his mind.

“Financial experts say diversification helps get the best results. Since overseas funds are giving decent returns, diversifying in the foreign markets can improve the returns of my portfolio,” argues the 25-year old telecommunication engineer from Raipur.

Shukla is not alone. International funds invest in companies listed in overseas markets. Many of these are feeder funds, which means the Indian scheme invests its entire corpus in an international master fund. For instance, DSP BR World Gold Fund invests in BlackRock Global Funds — World Gold Fund.

In total, there are 25 schemes that invest in equities of commodity companies or special themes across the world. Then, there are emerging market schemes that invest in Mexico, Brazil, Hong Kong and Korea. Rajat Jain, chief investment officer-equities, Principal Mutual Fund, says, “International funds are the best way to diversify, as an investor can participate in different kinds of markets.”

“Principal Mutual Fund’s Global Opportunity Fund invests across 25 different equity markets,” adds Jain.

According to Value Research, a mutual fund rating agency, international funds have returned 19.25 per cent over six months till December 3. In the same period, the Sensex and the Nifty have given slightly less, over 17 per cent. Equity-diversified funds (largecap and midcap) returned 16.5 per cent.

But industry experts feel the short-term data may not be too definitive. “Six months is too short a period to conclude about a fund’s performance. And, this category has a mix of commodity and equity funds,” says Hemant Rustagi of Wiseinvest Advisors.

The short-term spurt in returns of international funds is mainly on the back of the rally in commodities, in which most international funds invest. Funds such as Birla SunLife Commodity Equities, DSPBR World Mining and World Gold are some of the top performing funds in the category (returns 25-30 per cent) and invest in gold in six months. Equity funds such as HSBC Emerging Markets, Principal Global Opportunities and Franklin Asian Equity have performed on a par with the Sensex (returns between 15-20 per cent). Over one year, overseas funds have returned a dismal nine per cent against the Sensex’s and the Nifty’s 16.18 and 16.78 per cent, respectively. Consequently, experts feel one could take exposure to these funds, but only partially.

There are other risks, too. These funds are dollar-denominated and influenced by currency fluctuations. The money invested is first converted into dollars from rupee, and then, into the local currency. So, a lot depends on the performance of the local currency. At the time of redemption, the conversion happens the other way round. To overcome this, risk funds could invest in markets where the currency behaves like the rupee, say experts.

These funds are taxed as debt funds. Therefore, there is a tax of 10 per cent with indexation and 20 per cent without indexation on capital gains. One of the main arguments against these funds is that since the Indian markets have been doing exceptionally well, returns from foreign equities may not be too high. Also, a debt fund treatment will eat into the returns further.

“There are enough Indian funds to help a retail investor diversify and our markets have done better than the foreign markets,” says Pankaj Mathpal, a certified financial planner.

However, when commodities are on the rise, the feeder funds really perform exceptionally. Experts say high networth individuals, or even retail investors, could look at investing 5-10 per cent of their money in such funds.

Source: http://www.business-standard.com/india/news/investsmall-partportfolio/417362/