India, China look less attractive for investors on inflation worries

When mutual funds with a focus on the global markets made an offering in 2008, many wondered if it made sense for local investors. After all, the domestic stock market was the place to be in and this was also reflected in the fund flows from foreign institutional investors (FIIs) too. Many investors did feel vindicated as the domestic stock markets went on to become one of the best-performing markets in the following years.

Come 2011, the story has taken a little twist.

Not only has the domestic market turned volatile with its performance but some of the other markets have turned assuring with their show. As a result, it is not a bad idea for investors to allocate a portion of their corpus to these funds. However, in the long term, the domestic equity markets could prove to be better performers if the investment tenure is in the range of 10 years. On the other hand, allocation to global markets could be suited for aggressive equity investors who prefer equity as an investment class. The exposure to global funds can be used as a short-term strategy, with an investment horizon of 1-2 years.

Any fund needs to be chosen with a focus on the theme and it is no different for the global funds too. Though the choice of funds available for domestic investors is limited, most of the funds which are available are focused on commodities or economies in the Asia Pacific region. For instance, during 2008, many funds that were launched had an investment objective of investing in economies such as China and those in the Asia Pacific region, and the global financial turmoil didn't do much good to their performance. The worst affected were the real estate focused funds, with some of them still quoting 40-50 percent below their offer prices. Hence, one needs to tread the path carefully and use the allocation strategy.

An investment in a global market-focused fund may look less risky in the current environment because of the change in macro factors. While India and China continue to be the best destinations because of local consumptions stories, both also look less attractive because of inflation worries.

In the case of the Indian economy, the challenge of maintaining growth along with management of inflation is increasingly proving to be tough. The rising crude oil price has made things that much more difficult. To come back to the allocation issue, you can avoid sector-specific funds, particularly the ones focused on real estate as their ability to generate returns may be limited in the short span of 1-2 years. On the contrary, you can bet on commodity-specific funds as they have a larger exposure to commodities beyond gold or crude oil. While investors can also take up commodity trading on their own, their management and tracking are more challenging. While trading in stocks or commodities requires continuous monitoring, the latter can be more challenging than equity because of their dependence on global cues. Hence, an exposure to global commodity funds can be a good alternative.

Irrespective of the choice of fund or theme, global funds, like domestic funds, carry an element of risk, and hence asset allocation has to be followed. They may act as a hedge against over-exposure to domestic equity markets, but don't eliminate the risk factor.

Source: http://economictimes.indiatimes.com/features/financial-times/investment-in-global-funds-for-short-term/articleshow/7632700.cms