Monday, April 9, 2012

Do look at investing abroad

In 2004, Principal Mutual Fund became the first to introduce an international fund to Indian investors through its Global Opportunities fund, but the response was cold and the asset under management of the scheme stood at only Rs 37 crore.

The theme gained momentum and in 2007 and 2008 a number of fund houses — mostly foreign —launched their international funds in India, which over the last two years have beaten domestic equities hands down amid a depreciating rupee and weighing domestic concerns. While only a handful of Indian investors have invested into these schemes to take advantage of global diversification, it may take some more time before it is fully accepted by retail investors, experts vouch for the benefits of such schemes and a mild exposure to them.

Over the last one year when the Sensex fell by over 11 per cent and the average return of large cap domestic equity schemes is down by around 9 per cent, the international funds have done the job of protecting your capital as they have lost on an average only 1.8 per cent.

Over a two year period while the average return generated by international funds stood at a CAGR of 6.2 per cent, the Sensex has remained flat and large cap domestic equity funds have generated only 1 per cent.

What are international funds?
International funds are instruments that invest in global markets and offer you a route to invest outside India. There are fund-of-fund schemes that act as feeder funds and invest into an umbrella scheme of the fund house.

There are range of funds launched by fund houses that offer you exposure into — gold, commodity, energy, real estate, agriculture and equities of economies such as — China, US, Brazil, Latin America, emerging economies among others.

While there are 30 international schemes currently operational in the country offering exposure to various economies and asset classes, the total assets under management of these schemes in India is around $600 million (Rs 3,100 crore). This is close to 2 per cent of the size of the domestic equity funds which stands at around $34 billion (Rs 170,000 crore).

Why do they make sense?
The schemes launched in 2007 and 2008 went out of favour because of the global stock market crash in 2008 leading to a severe risk and underperformance of international equities while India fared relatively better. However, over the last two years when the Indian markets have been marred by concerns over inflation, high interest rates, corruption and rising crude oil and input costs, so of the other economies have done well and thus the outperformance.

“Those economies did well and India did not do too well and the problems were more Indian centric. Thus, opportunities continue to exist across various parts of the world,” said Arindam Ghosh, vice president and head of retail sales at JP Morgan Mutual Fund in India. “If you look at the stock market returns of 16 emerging markets over the last 13 years, every year the best performing country was different.”

Ghosh says that investors in no other country have as much home bias as in India.

Also at a time when inflation is a big concern and a lot of it is driven by commodity price rise, there are some who argue about hedging benefits by taking position in commodities.

“Globally you can get into commodities, which is not permitted in India and commodity is a great hedge against inflation,” says Navin Suri, MD and CEO, ING Investment Management.

Not just this, investors also can benefit out of a depreciating rupee by investing in these schemes which has been the case over the last 12-18 months. While they make sense, no one — including the fund houses — suggest investing more than 5-10 per cent of your investment corpus into such schemes.

“Start with diversified fund and do not go for sectoral fund or commodity play alone. Leave it on your fund manager to take exposure on such themes in your diversified fund,” says Surya Bhatia, a Delhi based financial planner.

Since international funds are dollar denominated, while rupee depreciation may benefit your international funds performance and thus enhance your returns, that is the biggest risk such schemes carry, which is why you must be aware of them.

Also international funds into different countries carry dual risk as your investment will have to be first converted into dollars and then into the local currency and vice versa at the time of redemption.

“Invest in such schemes but with a pinch of salt because the major risk that you carry is not of the funds but of the foreign currency fluctuations and it is tough to take a call. The other problem is that while you may understand the domestic equities to a certain extent, you may be completely unaware of the foreign markets and equities,” says Bhatia.

Also before you step out it is important to assess the geo-political and economic risk and the long-term growth potential a particular economy and accordingly invest.

One must also understand that the returns that these funds generated over the last 12-24 months may not be there every year as rupee may not depreciate the same way and India may not remain an underperformer in the near future. So, venture out only with easonable expectation and more so for the benefits of diversification rather than following higher returns.

Also unlike the Indian equity investment that is completely tax free, these schemes attract debt taxation of up to 20 per cent. But experts say that it also gives you indexation benefits and tax concerns should not bother much.

“All schemes are taxable. But you do get the benefit of indexation and if you hold it for long term then you can gain on the benefit and the tax will be definitely lower than your marginal tax rate,” says Bhatia.


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