Monday, April 05, 2010

(April 2010)

Going global…

Want to own a pie of Microsoft, Sony, Alcatel and various other top notch international companies? Looking to diversify your portfolio to include companies based in other parts of the world? Then you must seriously give a thought to global/international funds. Global funds are mutual funds that invest their money in companies located in other countries. They can also invest their money in a particular region, like Asia. Few funds are hybrid, i.e. they invest a part of their money in Indian companies and remaining portion of their money in international companies.

Basically international funds are of two types: one that abides by the income tax rules in the country and invests partly, that is, 65 per cent in Indian markets and the remaining in foreign markets. Funds like the Fidelity International Opportunities Fund and ICICI Prudential Indo Asia Equity Fund fall in this category. Moreover, funds like Fortis China India Fund and Mirae Asset China Advantage Fund invest only in one country (China) other than India. The second type of international funds is just the opposite; that is, the entire corpus is invested in international markets either through their foreign source companies or directly. Funds like Birla Sun Life International Equity Fund and HSBC Emerging Markets Fund belong to this category. They can invest either in international funds run by their foreign parents that would further invest in international markets, or they can directly buy and sell international stocks.

… yet to gain momentum

In India, investments in overseas markets have been allowed since 1997, yet only one per cent has been invested overseas. The assets managed by globally focused funds stood at only Rs. 7,259 crores ($1.55 billion) at the end of 2009, still quite far away from the total overseas investment limit of $7 billion allowed by the government. Bias towards the local markets, lack of understanding about risk, limited sources, and vested interests are the key reasons that can be attributed to investors ignoring the global markets. In developed markets, investors placed up to 50 per cent of their financial portfolios in overseas assets, half of which are in alternative assets like real estate. Given that global investing is new to India, an allocation of at least 20 per cent to global markets will give investors an optimum decrease in risk and growth in returns.

Dive deep to pick the pearl…

International investing offers the following advantages:

• An excellent diversification for your portfolio
• Ability to invest in international companies with smallest possible investment
• Investing abroad is simpler, since you just have to fill out the form and submit the payment in Indian rupees to the fund house

…and shun the shell

On the flip side, global funds suffer from the following disadvantages:

• High charges
• Currency exchange risk as you may lose money at the time of converting your profits from the foreign currency into Indian rupees
• No tax benefit that is normally offered to the investors in regular mutual fund
• Investing in just one foreign country is akin to investing in a sectoral fund that invests in just one sector rather than diversified equity funds that invest across sectors. The risk factor in this type of investment is a mixed bag. For example, if the economy of the country in which the funds are invested nosedives due to several micro- and macro-economic problems the fund is at a risk of losing out on performance. However, if the economy of that particularly country is doing good because of stronger basics then this type of fund will stand to gain.
• Very volatile as the NAV depends on the performance of stock markets in the native countries of the companies
• May take a long time to recover your investment as high charges and performance of stock markets affect the NAV

Dishing out divergent returns

In 2009, the global trend of international funds was mixed with emerging economies leading the rally. Take, for example, the stock markets in India and Brazil. They registered phenomenal growth. From 9.56 per cent growth in 2004, the Sensex touched a growth of 68.11 per cent in 2009. Similarly, the Bovespa in Brazil grew from 16.71 per cent growth in 2004 to 50.83 per cent growth in 2009. Other stock markets that recorded significant growths in 2009 included Shanghai in China (54.07 per cent), Hang Seng of Hong Kong (44.26 per cent), and the IPC in Mexico (28.77 per cent). As far as the returns from these funds are considered, the compounded annual growth rate (CAGR) of indices shows that while the returns from Dow Jones in the United States was in the negative at -1 per cent, the returns from Sensex in India and Bovespa in Brazil were +19.71 per cent and +19.25 per cent, respectively. Global funds investing in commodity stocks, emerging market stocks, and gold mining stocks have managed to outperform over the last one year. The top performing global fund in India over a one year period is Mirae Global Commodity Stocks Fund. Fidelity International Opportunities has returned around 4 per cent in the past year, while Prudential ICICI India Asia Equity Fund has a 5 per cent return and Fortis China India is slightly better than 6 per cent. All these schemes have a majority investment in Indian equities and only a part in foreign equities. DSP World Gold Fund, which invests in mining company stocks across the world, has a slightly negative return. While AIG Gold Fund has ended on the positive side. The average cost of the funds, that invest in both Indian and foreign markets, is around the 2.1-2.5 per cent mark. Franklin India International Fund invests in foreign debt markets in US Government securities. So this stands apart as another type of fund and this has returned double-digit figures in the past year due to the recent rally in the US securities market. This has an expense ratio of around 0.75 per cent, which is lower due to it being a debt fund.

There are some investors who lost almost their entire fortune investing in international funds in the year 2008. After all, the global economic crisis was at its worse during 2008. However, 2009 was a big relief. The reasons for this are many: in 2009, the overall average emerging markets funds returns grew by 76.1 per cent. As far as India is concerned, a strong banking system, comparatively less exposure of Indian companies to toxic funds and the increased foreign institutional investors investment (to the tune of Rs 84,266 crore in 2009), helped a lot. All these and many more factors have put India, along with China, on the road to recovery quicker than other economies. So does this mean that investing in international funds in 2010 would be equally fruitful? It might not be that easy to say so. There are many factors to consider before any conclusion is drawn.

Is it for you?

If you are willing to take risks in order to earn higher returns then investment in international funds is right for you. Are you patient enough to wait and watch your investment grow? Can you withstand the high volatility across the stock markets in different countries? Are you ready to pay tax on any profit earned from this investment? If you have answered in the affirmative to these questions, then go ahead and invest in these funds. However, do watch the charges and take care to ensure you choose a fund with a good track record.

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