FUND FLAVOUR

April 2011

On the platter…

Global funds are schemes that invest at least 65% of their corpus in foreign stocks or overseas mutual funds. A total of 26 global funds have been launched since foreign investment norms were eased in 2007. On offer are three types of funds: those that allow direct investing into global markets; funds that use the feeder route to invest in an existing global fund; and lastly, fund of funds that invest in several funds to achieve international exposure. Moreover, variety in international funds also comes from the fact that some of them invest in a particular region (say, China or South America). There are others that are commodity plays. They could be investing in gold mining companies or in agri-based companies, and so on. So, this is obviously a category for the sophisticated investor who knows exactly what kind of exposure he wants. Many of these funds come with adequate track records that will give you a sense of how they have performed in the past.

Why go global?

Diversification may be an oft-heard, hackneyed chant, but it can work wonders for returns from your stock investments. Global funds invest in various markets, allowing you to diversify and gain from the rise in other emerging and developed markets. In the past one year, the Sensex has risen by less than 7%, and the domestic diversified equity funds have earned an average return of just over 2%. On the other hand, investors in global funds, which diversify their investments in overseas markets, have earned close to 19% average returns during the same period. While most developed markets have been on a roll in the past year, the correction in the Indian markets has pulled down the returns of domestic-oriented schemes. Developed countries are following a different economic cycle. While the recovery in India is peaking, the developed world has just entered the recovery phase. The foreign investors, who had flocked to India and other emerging economies in 2010, have started packing up. Moreover, most global funds have performed better than the domestic funds mainly due to the rally in global commodity prices. The rally in gold prices has made AIG World Gold Fund the best performer in the past one year with 35.7% returns.. Another advantage of going global is that you get to buy a wider range of assets through your fund portfolio. For instance, silver ETFs and real estate investment trusts are common in developed markets. Global funds give you access to asset classes that are not even available in India. Moreover, you can invest in overseas markets without the paraphernalia of paperwork that is part and parcel of foreign investment.

A word of caution

Before you invest in global funds, keep in mind that the risks involved in overseas investments are far more complex than those in domestic markets. These include the country-specific risk, policy risk, as well as the exchange rate/currency risk. Some experts also believe that global funds do not truly diversify your portfolio. These are niche funds and, hence, the edge of true geographical diversification is missing. Besides, to exploit the diversification benefit, the choice of funds makes a bigger difference. The global funds that are highly focused on emerging economies tend to mitigate the diversification edge as they usually have a high correlation with India. The key is to evaluate the pros and cons to see if this investment avenue fits your needs.

Investing in international funds is for mature investors looking to diversify away risks. Once you have some idea of the risks and benefits of global investing, make an informed choice about whether you should enter this investment arena. You could make a cautious start by investing in a sector or theme that you understand and can track. Only then increase your exposure to global markets through global mutual funds.

Lackadaisical?

In 2007, as many as eight funds were launched that planned to invest overseas. All of them have performed very badly since inception. On an average, they have given returns as low as 0.1%. Only three to four funds among the lot have been able to give double-digit returns. Funds such as Birla Sun Life Commodity Equities Fund-GPM, Birla Sun Life Commodity Equities Fund- GA, Birla Sun Life Commodity Equities Fund-GMC, and Mirae Asset Global Commodity Stocks, have given double-digit returns of 16.2%, 26.4%, 18.1%, and 11.6 % respectively. All the others have given either a single digit return or negative returns, worse than a decent bank deposit. Global markets have been beset with many problems in the past three years -a financial meltdown in the US, debt troubles of European countries, Icelandic volcanoes, the fall and rise of commodity prices, etc. Concerns over Greece's debt overshadowed the tottering finances of Portugal, Spain, and Italy. Global funds have not been able to ride this volatility.

A fledgling at four (years)

Investing in global funds is relatively new to Indian investors. Most of the Indian investors have a concentrated India portfolio largely due to the fact that mutual fund / investment offerings in the country have been centered on the domestic market. Now that more international funds have come in through the feeder funds route, entering these funds will not only help in geographical diversification, but also reduce the overall portfolio risk. If you are a new investor, global funds are not for you. If you already have a sizeable sum invested in domestic funds, go in for global funds. But global equities should not take up more than 10-15% of your incremental investment in equities.