Monday, December 04, 2006

…Gyrating to Geographical Classification…

…Gyrating to Geographical Classification…

Classification by Geography

Domestic Mutual Funds are funds launched with a view to mobilizing the savings of the citizens of the country. These funds could fall under any of the categories mentioned under portfolio classification and operational classification.

Offshore Mutual Funds are funds launched with a view to mobilizing the savings of the foreign countries for investments in local markets. These funds facilitate cross border fund flow, which is a direct route for getting foreign investment. From the investment point of view, Offshore Funds open up domestic capital markets to the international investors.

Mutual funds that invest in foreign stocks and bonds provide an excellent opportunity to diversify your portfolio. They also reduce the country risk or the risk that all Indian investments could be affected by changes in Indian economy, politics, etc. If investments are chosen carefully, international mutual fund may be profitable when some markets are rising and others are declining. However, fund managers need to keep a close watch on foreign currencies and world markets as profitable investments in a rising market can lose money if the foreign currency rises against the dollar.

Offshore funds can invest in securities of foreign companies in accordance with the SEBI Regulations. Previously, Indian Mutual Funds were not allowed to invest overseas in stocks except in the case of quoted companies that had at least 10 per cent equity holding in Indian companies. This meant that hardly 40 or 50 global corporations (like Lever Brothers) qualified for Mutual Fund investment from India, thus reducing investment options. The latest budget has removed this rule and now Indian Mutual Funds can invest in any listed company on a foreign exchange anywhere in the world. So technically, an Indian MF can invest in Microsoft or Toyota or any listed company on any exchange.

Before the budget, Indian Mutual Funds were allowed to invest up to $1 billion abroad. Now this limit has been trebbled to $3 billion without any restrictions. Now Mutual Funds can spread their risk by investing more abroad and reducing their stake in Indian companies, if they so wish. With the rise in investment ceiling, each fund house will be able to invest approximately $125-$150 million. The Mutual Fund industry views the increase in overseas investment to $3 billion as a progressive roadmap for foreign investments through Mutual Funds in the future. Indian markets provide better returns currently. However, increased investment overseas imply increased risks and commensurate returns.

The combined corpus of the two existing schemes that invest a chunk of their assets in overseas instruments is just around $3.2 million. These are Principal PNB Mutual Fund’s Global Opportunity Fund and Franklin Templeton’s International Fund (the latter is a debt scheme that invests in US government securities). The first one off the block after the budget announcement was Franklin Templeton Investment, which launched the Templeton India Equity Income Fund. This is an open-ended diversified equity fund that can take an exposure of up to 50% in overseas stocks, which have a current or potentially attractive dividend yield.

Regional Funds make it easier to focus on a specific area of the world. This may mean focusing on a region (say Latin America) or an individual country (for example, only Brazil). An advantage of these funds is that they make it easier to buy stock in foreign countries, which is otherwise difficult and expensive. Similar to sector funds, you have to accept the high risk of loss, which occurs if the region goes into a bad recession. They are not found in India.

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