Monday, April 27, 2015


April 2015

Mutual fund industry's asset base has surged by nearly Rs 3 lakh crore in 2014-15 to become a Rs 12 lakh crore market, mainly driven by a smart rally in the equity market and the industry targets to reach an asset size of Rs 20 lakh crore by 2020. In fact, the mutual fund industry’s assets under management (AUM) hit a record Rs 12.02 lakh crore in February 2015 itself. Fund houses are upbeat about the industry's performance for the current fiscal (2015-16) as equity markets are expected to continue their momentum, making the segment attractive. In 2014-15, the country's 44 fund houses together saw a growth of 31% in their asset base to Rs 11.88 lakh crore at the end of March 31, 2015, according to data released by the Association of Mutual Funds in India. The AUM stood at Rs 9.05 lakh crore in the preceding fiscal and has been on the rise since 2011-12. The growth in asset base comes on the back of the BSE Sensex surging around 25% in the past financial year. The number of investors has also grown substantially in the past fiscal and a rally in markets and improving economic indicators are expected to result in a much more broad-based participation in 2015-16, especially among retail investors. However, AMFI's decision to put one per cent cap on upfront commission paid to distributors may impact the sector. Individually, HDFC Mutual Fund continued to retain its top spot with an AUM of Rs 1.62 lakh crore, followed by ICICI Prudential Mutual Fund (Rs 1.48 lakh crore), Reliance Mutual Fund (Rs 1.37 lakh crore), Birla Sun Life Mutual Fund (Rs 1.2 lakh crore), and UTI Mutual Fund (Rs 92,751 crore). The fiscal year, however, saw some exits in the mutual fund space. Those which have exited include Daiwa, ING, Morgan Stanley, Pramerica, Fidelity, and Pinebridge. 

Equity mutual funds saw 25 lakh investor accounts or folios added in 2014-15, mainly on account of a sharp stock market rally and strong retail participation. According to SEBI data on investor accounts with 44 fund houses, the number of equity folios jumped to 3.17 crore last month from 2.92 crore a year earlier. April 2015 saw the first rise in more than four years. Prior to 2014-15, the equity mutual fund sector had seen a continuous closure of folios since March 2009 after the global financial crisis hit the market in late 2008. Since March 2009, as many as 1.5 crore folios have been wound up. The investor base reached its peak of 4.11 crore in March 2009 while it was 3.77 crore in March 2008. Before 2014-15, there was a complete lull in equity inflows as well as generation of new folios, but in the past one year, equity markets have come back to life and yielded solid returns. A strong rally in the equity markets and the heightened investor interest led to a sharp increase in retail folios. The addition in equity folios is in line with the BSE Sensex surging 25% in 2013-14. Moreover, mutual funds reported net inflows of over Rs 68,000 crore in equity funds in the last fiscal year, helping the industry grow its folio count.

Debt funds saw huge outflows in March 2015 since it was the financial year end. Income funds saw net outflows of Rs.8,927 crore in March 2015 while liquid funds saw net outflows of Rs.1.13 lakh crore. Typically, corporate investors pull out money in the last week of the end of the quarter and put it back in the first two weeks of the subsequent month. Investors backed gilt funds on expectations of a rate cut by RBI. Gilt funds, which have seen continuous outflows in the recent past, saw net inflows of over Rs1,439 crore in March 2015. Lackluster performance of gold has led investors away from gold ETFs. The category saw net outflows of Rs.111 crore in March 2015. However, other ETFs, which track the equity indices, received inflows of Rs.623 crore in March 2015. Overseas fund of funds saw net outflows of Rs.83 crore in March 2015. Last month, overseas FOFs witnessed net outflow of Rs.78 crore. There are 31 international funds in the industry which manage Rs. 2,526 crore. All in all, the industry saw net outflows of Rs. 1.10 lakh crore largely on account of outflows from liquid funds. As a result, the industry’s AUM dipped to Rs.10.82 lakh crore in March 2015 from Rs.12.02 lakh crore in February 2015.

Piquant Parade
The Rs 12 lakh-crore Indian mutual fund sector is likely to witness a key trend reversal. After a spate of exits by foreign fund houses in recent years, Fidelity Investments, a global asset manager, is looking to re-enter the segment in India. The US-based fund house had exited India three years earlier, selling its mutual fund business to L&T Finance. Fidelity had assets under management (AUM) of Rs 8,800 crore, mostly equity, at that time.

Top fund house Reliance Capital Asset Management Company roped in the largest Korean asset management firm Samsung AMC for a strategic alliance, which will allow the two companies to manage, market, and distribute each other's investment products in India and South Korea. Samsung AMC, which manages assets worth over USD 165.8 billion and is part of the Samsung Group, is also looking to explore opportunities in the ETF market in India through this partnership. RCAM, which runs Reliance Mutual Fund, is part of Anil Ambani-led conglomerate Reliance Group's financial services arm Reliance Capital, which already has strategic tie-ups with financial services giants, including Nippon Life from Japan for its insurance and mutual fund businesses, among others. The two firms will also seek to develop and explore business opportunities in active and passive strategies, leveraging upon their specific investment and distribution reach, in India and Korea. 

Regulatory Rigmarole

The recent capping of upfront commissions that fund houses can pay distributors shows online platforms in a better light. They save on costs by keeping client interaction to the minimum while focusing more on client servicing. Presently, there are a handful of such online platforms. Some of the more prominent ones include Next Advisors, NJ India Invest Pvt. Ltd. (one of India’s largest Mutual Fund distributors), stock exchange platforms like BSE StAR MF and NSE–NMFII, and those run by and iFast Financial (two online portals where investors can also independently buy and sell mutual funds). MF Utility (MFU)—an online web-based tool by the Association of Mutual Funds of India—is more of an order routing mechanism than a platform as such. The MFU still requires a paper trail, but its next phase will bring about online capabilities. Stock exchange platforms are end-to-end platforms, while others are aggregators that bring together distributors on a technology platform and ride on full-fledged platforms. Typically, online platforms remove the need for physical intervention and form filling. Once the distributor comes on board and opens her own account, she can select schemes on behalf of her client and a web link goes to the client. The client then has to confirm the order (and check if the schemes are the same ones that were agreed upon and other details) and make the payment. Every time the client has to make a payment to buy mutual fund units, she has to log into her Internet banking account. Money goes out of the client’s account and straight to the fund house, and the client gets her units. At the core, that is how most platforms facilitate a paperless transaction. Over and above this, different platforms can have subtle differences. The NJ and Next Advisors platforms, for instance, entail that the investor buys and sells the fund herself. In these platforms, upon onboarding, the distributor gives the client a login name and password. The investor has to log onto the platform, select funds that she wishes to buy and use the Internet banking facility to make the payment. Additionally, NJ’s platform allows the distributor to get a power of attorney (PoA) from the client (subject to an upper limit). Using the PoA, the distributor can move the money from the client’s account using the auto-debit facility. This is in addition to buying and selling units in the offline mode, and filling in forms and visiting the registrar and transfer agent’s office to submit the same. Units are bought on the basis of NJ’s AMFI Registration Number (ARN). This means that although every sub-broker in the NJ network has their individual ARN, only NJ’s ARN gets finally recorded in the fund house’s records. Approximately 25% of NJ’s business comes through its online channel. Next Advisors is purely a technology platform built by a few distributors. It enables a whole network of mutual fund agents to offer schemes online to distributors. Here, the transactions get recorded in the distributor’s own ARN. The other types of platforms are those run by the stock exchanges. On offer since December 2009, stock exchange platforms did not initially take off because, in the early days, they allowed only stock brokers to sell mutual funds to clients. Eventually, in 2013, laws were rewritten to allow independent financial advisers (IFAs) to enter the platform. But there was a common irritant that persisted; units bought and sold could only be in the dematerialized format. That changed in December 2014 when the Securities and Exchange Board of India allowed non-demat transactions on stock exchanges. This could change the way mutual funds are bought or sold in a big way. Those investors who are not inclined to open a demat account can now invest through the exchange platforms, if their distributors are members there. In fact, the NSE-NMFII also has plans to link your Permanent Account Number to its backend database that will pull out all your previous mutual fund transactions, even if you have purchased units outside the NSE. This will enable your distributor to give you a holistic view of your portfolio. While distributors’ income has come down due to regulatory tightening, their need to invest big sums of money to build capabilities has also reduced with such platforms. Most allow them to generate various reports for their clients to give them a better understanding. But the biggest game changer will come when SEBI allows advisors to invest client’s money in direct plans, but under the advisor’s code. Advisors can then use these platforms, offer cheaper direct plans (with lower expense ratios), service them on such investments and charge fees at the same time.

Indian mutual fund houses outpaced foreign peers in asset growth for a third year in a row in 2014-15. A better brand connection with investors, relatively high proportion of equity assets and recent exits of several foreign names have helped domestic players maintain their dominance in the Rs. 12-lakh crore mutual fund industry. In 2014-15, the overall industry's average AUM grew 31.3%, lifting the asset base from Rs. 9.05 lakh crore to Rs. 11.88 lakh crore. Domestic fund houses, put together, put up a better show as their assets rose 31.5%, while foreign peers’ collective assets were up 29.4%. In FY14, domestic players grew 11.7% while foreign AMCs could register a growth of 3.73% and in FY13, the AUM growth rates were 23.5% and 17.5%, respectively. Further, foreign fund houses are continuously losing market share since 2012. During these years, they have lost nearly 1.3% to local players. Currently, they control 10.4% share of the industry's total AUM as against 11.8% in 2012. Exits of fund houses like Morgan Stanley, Fidelity, ING, Daiwa, and Pine Bridge in recent years have contributed to this state of affairs. Ultimately, it is the consistent performance of schemes of fund houses that matter the most. 

Monday, April 20, 2015

April 2015

Variety is the spice of life

NFOs of various hues have hit the market in April 2015. Equity funds, debt funds, hybrid funds, Capital Protection Funds, and so on and so forth. It could soon rain Exchange Traded Funds (ETFs) in the market as different fund houses line up innovative variants to this instrument that is gaining popularity in the country.

DSP BlackRock Dual Advantage Fund – Series 37 – 36M

Opens: April 06, 2015
Closes: April 20, 2015

DSP BlackRock Mutual Fund has launched a new fund named as DSP BlackRock Dual Advantage Fund - Series 37 - 36M, a close ended income fund. The primary investment objective of the fund is to generate returns and seek capital appreciation by investing in a portfolio of debt and money market securities. The fund also seeks to invest a portion of the portfolio in equity and equity related securities to achieve capital appreciation. As far as investments in debt and money market securities are concerned, the fund will invest only in securities which mature on or before the date of maturity of the fund. The fund will invest 50-95% in debt securities, up to 15% in money market securities with low to medium risk profile and 5-35% in equity and equity related securities with high risk profile. Benchmark Index for the fund will be CRISIL MIP Blended Index. The fund will be managed by Dhawal Dalal and Vinit Sambre.

ICICI Prudential Capital Protection Oriented Fund VIII – 1103 Days Plan B

Opens: April 06, 2015
Closes: April 20, 2015

ICICI Prudential Mutual Fund has launched a new fund named as ICICI Prudential Capital Protection Oriented Fund VIII - 1103 Days Plan B, a close ended capital protection oriented fund. The tenure of the fund is 1300 days. The investment objective of the fund is to seek to protect capital by investing a portion of the portfolio in highest rated debt securities and money market instruments and also provide capital appreciation by investing the balance in equity and equity related securities. The securities would mature on or before the maturity of the plan under the fund. The fund will allocate 70%-100% of assets in debt securities and money market instruments with low to medium risk profile and invest up to 30% of assets in equity and equity related securities with medium to high risk profile. Benchmark Index for the fund is CRISIL MIP Blended Index. The fund managers are Vinay Sharma (equity portion), Chandni Gupta and Rahul Goswami (debt portion) and Shalya Shah (for investments in ADR/GDR and other foreign securities).

DWS Large Cap Fund – Series 3

Opens: April 10, 2015
Closes: April 20, 2015

Deutsche Mutual Fund has launched a new fund as DWS Large Cap Fund - Series 3, a 1281 days close ended equity fund. The tenure of the fund is 1281 days from the date of allotment of units. The objective of the fund is to generate capital appreciation from a diversified portfolio of equity and equity related securities of large cap companies in India. The fund will invest 70-100% of assets in equity and equity related instruments of large cap companies, invest up to 30% of assets in equity and equity related instruments of non-large cap companies with high risk profile, and invest up to 10% of assets in debt and money market instruments with low to medium risk profile. The benchmark index for the fund is CNX Nifty Index. The fund manager will be Akash Singhania.

HSBC CPO Fund - Series II –Plan III

Opens: April 16, 2015
Closes: April 23, 2015

HSBC Mutual Fund has launched a new fund as HSBC CPO Fund – Series II – Plan III. The fund seeks to protect capital by investing a portion of the portfolio in high quality debt securities and money market instruments and also to provide capital appreciation by investing in equities through NIFTY (Index) Call Options. The fund will be benchmarked against the CRISIL MIP Blended Index. The fund manager is Mr. Sanjay Shah.

HDFC Focused Equity Fund –Plan B

Opens: March 26, 2015
Closes: April 24, 2015

HDFC Mutual Fund has launched a new fund named as HDFC Focused Equity Fund - Plan B, a close ended equity fund investing in eligible securities as per Rajiv Gandhi Equity Savings Scheme. The investment objective of the fund is to generate long term capital appreciation from a portfolio of Eligible Securities as specified in Rajiv Gandhi Equity Savings Scheme. The plan will invest 95%-100% of assets in equity securities specified as eligible securities for RGESS debt instruments and government securities with medium to high risk profile and invest up to 5% of assets in money market instruments and liquid schemes with low to medium risk profile. Benchmark Index for the plan is S&P BSE 100 Index. Srinivas Rao Ravuri is the fund manager.

Axis Hybrid Fund Series 22

Opens: April 21, 2015
Closes: May 5, 2015

Axis Mutual Fund has launched a new fund named as Axis Hybrid Fund Series 22. It is a hybrid debt-oriented conservative fund. The fund aims at generating income by investing in high quality fixed income securities that are maturing on or before the maturity of the fund whilst the secondary objective is to generate capital appreciation by investing in equity and equity related instruments. The fund is benchmarked against the CRISIL MIP Blended Index.  Mr. Devang Shah and Jinesh Gopani are the fund managers.

Quantum Dynamic Bond Fund

Opens: April 29, 2015
Closes: May 13, 2015

Quantum Mutual Fund has launched a new fund as Quantum Dynamic Bond Fund. The investment objective of the fund is to generate income and capital appreciation through active management of a portfolio consisting of short term and long term debt and money market instrument. The fund aims to provide optimal returns with moderate levels of risk and high liquidity through judicious investments in money market and debt instruments. The fund will be benchmarked against the CRISIL Composite Bond Fund Index. The fund manager is Mr. Murthy Nagarajan.

SBI Dual Advantage Fund X to XII, Kotak Capital Protection Oriented Fund - Series 1 and 2, Peerless Long Term Advantage Fund, UTI Capital Protection Oriented Fund – Series VI, ICICI Prudential India Recovery Fund – Series 4 to 8, Religare Invesco Balanced Fund, and IDBI Retirement Saving Fund are expected to be launched in the coming months. 

Monday, April 13, 2015

April 2015

International funds have exhibited mixed performance in the past year. Within the international category, investors have a few choices and they need to look at the country and theme to assess if a particular fund is suitable.

GEMGAZE enables you to do exactly this. The five sparkling GEMs among the global equity funds in India in 2014 have retained their preeminent status in 2015 also.
Principal Global Opportunities Fund Gem

Principal Global Opportunities Fund is an open-ended balanced fund of fund launched by Principal Financial Group (Mauritius) Limited. The fund is managed by Principal PNB Asset Management Company Private Limited. It invests in funds which invest in the public equity and fixed income markets across the globe. Launched in March 2004, Principal Global Opportunities Fund is the oldest global fund in India. With an AUM of Rs 19 crores, Principal Global Opportunities Fund has earned a one-year, three-year, and five-year returns of 7.66%, 6.18%, and 7.66% respectively. Being a feeder fund, the performance of the fund depends entirely on Principal Global Investors – Emerging Market Equity. 98% of the portfolio is in equity, predominantly mid and small cap stocks. The fund is benchmarked against the MSCI World Index. The expense ratio is 0.94% and the portfolio turnover ratio is 10%. The fund has been managed by Mr. Rajat Jain since inception.

Templeton India Equity Income Fund Gem

With an AUM of Rs 1,023 crores, the one-year return of the Templeton India Equity Income Fund is 39.44% as against the category average of 50.58%. The fund is managed by renowned fund manager Dr. J Mark Mobius and assisted by Chetan Sehgal and Vikas Chiranewal. The fund’s philosophy is investing in growth stocks trading at a significant discount to their earnings potential. The team prefers issues that are cheaper than their peers, the broader market, and historical valuations. Therefore, in-depth research is core to the process. While evaluating companies, both qualitative and quantitative factors are considered. For this fund, foreign equities comprise roughly 30% of the portfolio. The team follows a similar approach for picking foreign stocks but typically scouts for companies in sectors that may not be well established in India. Stocks are identified by assessing price in relation to the intrinsic value through an analysis of cash flows, earnings, and asset value. Three features make the fund stand out from peers: value, bargain hunting, and long-term orientation. The expense ratio of the fund is 2.46% and the portfolio turnover ratio is 10%.

DWS Top Euroland Offshore Fund Gem

Deutsche Mutual Fund had changed the name of DWS Invest Global Thematic Offshore Fund to DWS Top Euroland Offshore Fund. The underlying fund has been changed to DWS Invest Top Euroland, a Germany-based fund. The feeder fund was earlier investing in DWS Invest Global Thematic Fund based in the US. The fund's benchmark has been changed from MSCI World Index to EURO STOXX 50. The India-based fund allocates 95-100% of its assets to units of the overseas fund. Its allocation to debt instruments in the domestic money market stays between 0 and 5%. With an AUM of a mere Rs 39 crores, DWS Top Euroland Offshore Fund has earned one-year, three-year, and five-year returns of -3.9%, 11.1%, and 9.46% respectively. There has been a reversal of fortunes in the three-month period with the return at 12.04%. The expense ratio of the fund is 2.19% and the portfolio turnover ratio is 111%. The fund managers are Kumaresh Ramakrishnan since July 2007 and Akash Singhania since December 2012.

Sundaram Global Advantage Fund Gem

Sundaram Global Advantage Fund was launched in July 2007. The fund has an AUM of Rs 28 crores. Sundaram Global Advantage Fund has earned a one-year, three-year, and five-year returns of 0.07%, 6.27%, and 6.73% respectively.  The fund has invested in 10 foreign equity mutual funds, with Fidelity South East Asia and DB Tracker Emerging Markets Asia being the top two funds. 95% of the fund’s assets are in equities with the rest in cash. The fund is benchmarked against the MSCI Emerging Markets Index. The fund managers are Mr. J. Venkatesan since January 2008 and Mr. S. Bharath since November 2009. The expense ratio of the fund is 1.4%.

ICICI Prudential Indo Asia Equity Fund Gem

ICICI Prudential Indo Asia Equity Fund was launched in September 2007. The fund has an AUM of Rs 154 crores. Its one-year return is 47.79% as against the category average return of 45.55%. ICICI Prudential Indo Asia Equity Fund, an open-ended diversified equity fund offers a balanced portfolio of investment opportunities in India as well as Asia ex-Japan, where the offshore allocation is aimed at improving the return and risk characteristics of the portfolio over a longer term. This fund invests 65-100% in Indian equity and 0-35% in IOF Asian Equity Fund; a diversified fund managed by Prudential Asset Management, Singapore. The Indian component is managed as a flexi-cap fund and seeks to benefit from diversification across developed and emerging economies across Asia (ex-Japan). The fund has access to global leaders not otherwise available e.g. Industrial and Commercial Bank of China (China), Samsung Electronics (Korea), Taiwan Semi-Conductor (Taiwan), and access to industries not otherwise available e.g. Taiwan's semi-conductor industry, Hong Kong's property sector, China's insurance, and aerospace industries, Korea's ship building industry. The Fund is benchmarked against CNX Nifty (65) and MSCI AC Far East Free Ex-Japan (35). 96% of the assets of the portfolio are in equity. The expense ratio of the fund is 2.72% and the portfolio turnover ratio is 68%. The top three sectors are finance, automobile, and healthcare, constituting 73% of the assets. The fund managers are Atul Patel and Sankaran Naren since February 2015. 

Monday, April 06, 2015

April 2015

Global/International Funds

In a world that has become increasingly connected, inviting the world into our investment strategy seems like a no-brainer. Indian investors largely ignore this global interaction and the opportunity to tap those investments. To change that disposition, embracing the whole world on a global basis may be something you should consider. “International” and “Global” have different meanings when it comes to investments. International refers to anything outside the Indian borders. Global includes India in a whole world strategy. 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. You even have passive funds in this category. So, this is obviously a category for the sophisticated investor who knows exactly what kind of exposure he wants.

On a positive note…

Like foreign travel or cuisine, international investing can be a great way to diversify your portfolio and discover new opportunities that you otherwise might have missed by sticking close to home. International mutual funds offer two big advantages for small investors: access to professional management and instant diversification. When you invest in an international stock fund, you are buying a slice of larger, more diverse portfolio than you could ever hope to assemble on your own. The reason you should consider global investments is that by spreading your money among several markets, you achieve what stock market theorists have been propounding for years -diversification and hedging risk by spreading it across a mix of assets and markets. Individual economies are subject to economic cycles. By investing in several economies at a time, your portfolio can earn smoother returns. Besides reducing risk through diversification, global investing can also boost your portfolio returns. With no country managing to be at the top of the charts each year, the case for spreading your investments across countries definitely gets stronger. What is more, all the investment decisions are made by portfolio managers with experience in global markets. Liquidity and convenience are the hallmarks of any mutual fund investing, not to mention, international funds.  It has been observed over the years that a judicious combination of foreign and domestic investments generate better returns at lower levels of risk.

On the flipside…

While investments in all mutual funds involve risk, investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuations and changes in political, regulatory or economic conditions. There is the risk of volatility in currency exchange rates. If the foreign currency in which your fund is invested falls in value vis-a-vis the rupee, then your investment returns will suffer despite the gains your fund may have made in the market. There is also the issue of taxation that could prove to be a potential minefield. Since hybrid global funds invest 65-70% of their corpus in domestic companies and the balance in overseas markets, investors in these funds are eligible for the tax exemption on long-term gains from these funds. The capital gains from other funds that invest in overseas markets are treated in the same way as long-term capital gains from debt funds. All these factors may result in greater share-price volatility. These risks are magnified in emerging or developing markets due to their less established markets and economies. International equity mutual funds may not be appropriate for very conservative investors, but for those seeking to broadly diversify their portfolios to include the global investment universe, and willing to bear a higher degree of risk, they can literally offer a world of opportunities.

Lacklustre performance?

Gold, commodities, real-estate and sectors where there are limited opportunities to invest in India — these are some themes that international funds sport. In the past, a depreciating rupee against the dollar helped these funds deliver well. But a stable or improving domestic currency over the past one year has meant reduced returns. International or global funds have continued to underperform their domestic diversified peers across timeframes. Among the 31 global funds, only 15 funds have a five-year track record. Birla Sun Life Global Real Estate, formerly known as ING Global Real Estate, has topped the table by delivering an annual return of 14% over the past five years. Over a one-year period, the funds have gained only 10%.

Bottom of Form
International funds have failed to match the outstanding performance of their domestic counterparts in 2014. The category trailed all other categories of mutual funds except for gold funds by a wide margin and managed to offer only 2.56% average returns to investors in the past year. During the same period, diversified equity funds offered an average return of over 30% and mid- and small- cap funds gave an average return of 74%. Ten mid- and small-cap funds posted returns above 85%, with micro-cap funds leading the pack. Even debt funds with a longer-term maturity like gilt and income funds have generated an average return of 16% and 13% on hopes of a rate cut amid moderating inflationary pressures. Most domestic equity mutual fund schemes have posted a phenomenal performance in 2014 as the market touched an all-time high. There was a turnaround in the economy after the general elections. Macroeconomic variables turned favourable with oil prices falling, reduced inflation rates, markets breaking new records every day and overall improved sentiment in the economy. Amidst all this euphoria, international funds cut a sorry figure. Among them, thematic funds were the worst hit, with some funds posting negative returns during the previous year. For example, DSP Blackrock Mining Fund offered the lowest return of -22.38% and HSBC Brazil around -19.73% last year. Funds with gold, commodities, and energy as underlying themes in the international fund category have also fared poorly. These funds did not deliver even in 2013.

Winning themes…

An analysis of the returns of global funds over the last one and three years shows that two themes worked well. One, funds which invest in Asia. In the last three years and especially over the past one year, many funds which invest in Asian markets — China, Singapore, Indonesia, Taiwan, and South Korea — have done extremely well, delivering 15-22%. These markets offer attractive avenues for investment in sectors such as semiconductors, energy, utilities, mining and telecommunication services. Some markets such as Mexico and Argentina too have rallied quite well, though Brazil continues to be a laggard in the Latin American market. In this category, funds such as Templeton India Equity Income, JP Morgan JF Greater China Equity Offshore, JP Morgan JF ASEAN Equity Offshore, and Kotak Global Emerging Market delivered a 12-29% over the past one year. Funds which invest in developed markets, on the other hand, saw very few outperformers. But Birla Sun Life International Equity – Plan A has been a consistent performer in this category as it invests in the US, Germany and a few other European countries, making it a well-diversified basket. Markets in these countries are trading at multi-year highs. The second winning theme was real estate, but only one fund capitalised on this. ING Global Real Estate has delivered exceptional returns of 15.3% over the past three years and 21% in the last one year. The scheme invests in stocks and REITs from across the world.
Losing themes…

While international funds playing on Asia and real estate did well, those betting on commodities and natural resource-reliant countries fared poorly. The weak global economic outlook led to a very sedate performance from a range of commodities in the past year. Coffee and sugar prices, for instance, have fallen substantially on higher trade surpluses. With key consuming nations such as Europe seeing poor demand, crude oil and base metal prices too have been flat. Funds which bet on commodities and agricultural products or specific countries expecting them to benefit from a rally have seen erosion in NAVs. Mirae Asset Global Commodity Stock, ING Global Commodities, Birla Sun Life – CEF – Agri Plan, have all delivered poor returns for this reason with declines of 4-5% in the last one year. In a surprising twist, funds that bet on gold mining stocks have proved laggards too. Gold prices have fallen, with its safe haven allure fading with rebounding equity markets. On top of this, stocks of gold mining companies have trailed the yellow metal. Companies such as Newcrest, Goldcorp, and Kinross have witnessed around 30% fall in their stock prices in one year. This has decimated NAVs of DSPBR World Gold Fund and PineBridge World Gold Fund, which invest in this space, with a 18-19% erosion in their NAVs. Among funds riding on such themes, L&T Global Real Assets (earlier Fidelity Global Real Assets) has been a consistent performer. It has delivered over 12% annually over the past three years, outperforming both domestic funds and most international schemes.
Points to ponder

Given this mixed performance, should you invest in global funds? There are many positives to it. First, you diversify risks by investing across markets. The international basket is much wider than the domestic. Second, global markets are cheaper. For instance, the DJIA, S&P 500, FTSE, and CAC trade at 13-14 times historic earnings (Bloomberg), while domestic benchmarks are at around 16 times. Two, despite the rally in the developed markets, the valuation multiples are also at par or lower than their historic averages. Third, the icing on the cake — gain from a falling rupee.

The bottom line for investors

Do, however, take the following points into account before the plunge. One, international funds are treated as debt funds and taxed accordingly. Two, while global funds may appear good for diversification, Indian markets are likely to offer better returns over the long term. Hence they must form not more than 20% of your portfolio depending on your risk tolerance and focus on growth. Three, avoid high-risk commodity or theme-based funds; they require timing. Finally, invest in funds with long-term track record and mandate.
Take the SIP route to build a global portfolio

If you want a truly diversified portfolio, having an investment in international equities is essential. While there are some risks, and some investors fear the unknown, international equities make up a large part of the world market's potential investment growth. Begin with a 5% exposure to international equity and gradually raise it to about 20% of your equity portfolio. The SIP route is important because these funds are subject to dual volatility—equity market and currency oscillation. Hence, it is all the more important to use rupee cost averaging to smoothen out this volatility. Of the 20% exposure, invest a portion of it in the developed markets and the balance in the emerging markets. Conservative investors will favour developed markets over emerging markets. Your foray into international markets should begin with passive schemes, such as index funds and ETFs. These are low-cost funds and offer market equivalent returns. Only when you are ready to take higher risk and know the market better should you venture into actively managed funds. Look for the word "international" as opposed to "global" when choosing a foreign investment fund.