Monday, April 29, 2019

April 2019

AMFI’s latest data shows that B30 cities account for 15% of the total Rs.24.6 lakh crore mutual fund industry assets. AUM from B30 cities touched Rs.3.80 lakh crore in March 2019.  A large proportion of the B30 assets (65%) come in equity funds. This is because of increasing popularity of equity among retail investors in these cities. Analysis of data shows that assets from B30 cities increased by Rs. 42,368 crore, a growth of 13%, between April 2018 and March 2019. AMFI’s investor education campaign has increased awareness about mutual funds among investors in non-metros. In addition, easy access to internet and growth in online transaction platforms, have also allowed investors, who do not have easy access to physical distribution networks, to invest in mutual funds. Distributors and IFAs have been instrumental in spreading the message of mutual funds among investors in B30 cities, be it through physical or online channels. Of the Rs.3.80 lakh crore B30 AUM, Rs.3.10 lakh crore (82%) have come through regular plans. Associate distributors or sponsors of AMCs have channelized Rs.73,390 crore through bank branches in B30 locations while the rest have been brought by non-associate distributors. Investor-wise analysis of the data shows that B30 cities account for 23% of individual assets of the industry. Individual assets include retail and HNI assets. B30 cities, however, account for only 6% of institutional assets as on March 2019.

Regulatory Rigmarole

The Securities and Exchange Board of India issued a circular to mutual funds on how to value their debt schemes when a security in the portfolio got downgraded to below investment grade. SEBI announced two measures that will make the net asset value of debt funds more realistic. Whenever any security that your debt funds hold gets downgraded to below investment grade, the designated rating agencies will now have to provide the value based on which your debt fund will have to value it. Earlier, credit rating agencies did not provide values of securities that get downgraded to below investment grade. In such cases, fund houses used to value them as per their internal guidelines. Mutual fund’s net asset value is a reflection of its underlying portfolio. If the prices of the underlying securities rise, the NAV goes up and vice versa. Since the debt market is illiquid, not all securities get traded on a given day. Hence, two rating agencies, CRISIL and ICRA are given the task of giving out valuations of all the debt securities where the debt funds have invested. They collate these prices daily and send the list to all mutual funds, as per the AMFI mandate. Debt funds refer to these prices and then compile their NAVs. But rating agencies provide prices of only those securities whose credit rating are up to the investment grade (‘BBB’). Now, SEBI has said rating agencies to provide the new values of securities also where the rating has been downgraded to below investment grade. Hence, there will now be uniformity in the way such securities will be marked.

Mutual fund houses in India were so far not permitted to invest in commodities other than gold. At most, a few fund houses had thematic funds investing in the equity of companies engaged in the commodities business. But that is set to change with the Securities and Exchange Board of India circular on March 1, 2019, permitting mutual funds to invest in commodity derivatives, with an aim to deepen the nascent commodity market. Mutual funds could either launch dedicated commodity funds or use it for hedging purpose. There is also a possibility of fund houses launching hybrid products of equity and commodities. Since SEBI started regulating commodity markets after the Forward Markets Commission (FMC) got merged into it in September 2015, the capital market watchdog had been working towards developing the commodities market by bringing in more products and participants like FPIs, insurance and mutual funds. SEBI was concerned about low participation of producers and hedgers in the commodity market. Since 2017, SEBI planned to change commodity market rules to introduce transparency, reduce risks and include new participants such as banks, mutual funds, foreign portfolio investors (FPIs) and alternative investment funds, in an effort to improve liquidity. This move will give retail investors indirect exposure to the commodities market for the first time. Commodity funds will be able to invest in a broader spectrum of commodity derivatives agricultural, metal and mining commodities such as food crops, spices, fibres, copper, aluminium, oil, gold, silver, and platinum.

SEBI has said that mutual funds will have to disclose assets under management of their schemes on a daily basis, coupled with an additional benchmark and product labelling. In a clarification letter to AMFI, the market regulator said, “The AUM of all schemes except liquid schemes has to be disclosed on daily basis on AMFI website.” AMFI had earlier requested SEBI to do away with the requirement of publishing the daily AUM of mutual fund schemes. SEBI said that in case of liquid schemes the closing AUM, and the AUM of the previous month has to be disclosed on the AMFI website on a daily basis. However, if the AUM movement of the schemes is over 10% from the previously disclosed AUM, fund houses will have to disclose the AUM of that day. AMFI had asked to do away with the requirement to prevent unhealthy competition. Also, the extensive media glare on AUM figures may result in unnecessary pressure on funds. At the same time, SEBI accepted AMFI’s request on the performance disclosure of short term schemes such as overnight fund, liquid fund, ultra-short duration fund, low duration fund, and money market funds. SEBI said that mutual fund houses will have to disclose the performance for a period of seven days, 15 days, one month, three months and six months. SEBI also clarified that AMCs can disclose AUM of growth option of both regular and direct plans.

SEBI has modified the formula of calculating the total expense ratio (TER) for beyond 30 (B30) cities. TER is a percentage of a scheme's corpus that a mutual fund house charges towards expenses which include administrative and management expenses. Earlier, only 'retail' assets were included in calculating the ratio. With the new formula, SEBI has allowed fund houses to consider both, retail and HNI assets while calculating the ratio. The ratio at present is 30 bps of the total assets garnered.

Fund houses have incorporated changes to their TER slabs to comply with the SEBI new norms. Earlier, SEBI announced fresh AUM slabs and gave a roadmap to fund houses on how they can make changes to their TER based on asset size of the scheme. While the market regulator has capped TER at 2.25% in equity funds and 2% in other than equity funds, SEBI has followed economies of scale to reduce TER. Similarly, fund houses cannot charge more than 1.25% in close end equity funds and 1% in close end debt funds. SEBI has also asked fund houses to charge a maximum TER of 1% on passive funds such as index funds and ETFs. On fund of funds (FOFs), SEBI has said that FOFs investing in liquid, index and ETFs cannot charge over 1%. On the other hand, FOFs investing primarily in actively managed funds can charge up to 2.25% in equity funds and 2% in other than equity funds.

SEBI has asked AMCs to set up technology committee to review their cyber security and cyber resilience framework among other things. The committee should comprise experts in technology and have at least one independent expert with relevant experience in BFSI. In a circular, SEBI said, “The role of technology related aspects has become even more critical in managing risks related to asset management business. In order to deal with various technology-related issues, AMCs are advised to constitute a technology committee comprising experts proficient in technology.” SEBI further said that forming such a committee is the need of the hour, as rapid technological advancement in securities market is having a major impact on various functions of AMCs

SEBI has revised the system audit guidelines for mutual funds. System audit includes both front and back office processes such as fund accounting, calculation of NAV, financial accounting and so on. SEBI has advised fund houses to implement these guidelines from the current financial year. In addition, AMCs will have to conduct their audit annually through an independent Certified Information Systems Auditor (CISA)/Certified Information Security Manager (CISM) qualified or equivalent auditor.

AMFI has asked AMCs and mutual fund distributors to update the email ids and mobile numbers of their clients to comply with its code of conduct. The trade body has asked its members and distributors to finish this task by June 1, 2019. In a recent circular, AMFI said distributors must ensure that the addresses and contact details filled in the mutual fund application form are of the investor and not of any third party. “Distributors should refrain from filling information of their own or of their employees as the investor’s contact details in the application form, even if requested to do so by investors.”AMFI further said, “It has been brought to AMFI’s attention by one of the RTAs that despite such clear guidelines, several distributors have provided their own email id and mobile numbers instead of their clients’ contact details. This is not only in violation of the AMFI guidelines, but also deprives the clients from receiving important communication sent by the AMCs. Also, the AMCs will not be able to contact the investors directly, in case of any urgent requirements.”

SEBI has asked AMCs not to spend IAP corpus on mutual fund distributors to create awareness about mutual funds among their clients. In a letter to AMFI, SEBI has pointed out instances where AMCs have used IAP corpus to create awareness among distributors’ clients through the distributor websites or magazines. SEBI said, “It has been observed that AMCs are conducting IAPs on distributor’s platforms viz. web banner, distributors sending e-mailers to investors, publishing education advertisement in monthly magazine of distributors etc.” The market regulator has clarified that such IAPs create awareness only among clients of distributors or RIAs instead of direct plan investors and new investors. SEBI said, “The cost incurred on IAP initiatives through distributors or investment advisors shall not be charged to IAP corpus i.e. 1 bps earmarked by the AMC.” AMCs cannot fund IAP conferences of IFA associations if such events are restricted to their clients. However, if they hold such events for investors at large, AMCs can use IAP corpus to fund such events. SEBI has also asked AMCs to use other modes to reach out to people at large.

SEBI has issued a consultation paper to appoint Self Regulatory Organisation (SRO) for mutual fund distributors and registered investment advisors (RIAs). Sharing the rationale for SRO, SEBI said that mutual fund distributors and RIAs are becoming important players and growing in numbers. “There are approximately 1.24 lakh distributors as on February 28, 2019 and 1136 RIAs as on March 19, 2019. Therefore, their direct supervision by SEBI would be challenging. Hence, some form of a first level regulator is required to have an oversight on them. In this view, it is proposed to have SRO(s) to regulate the mutual fund distributors and RIAs.” Further, SEBI has acknowledged the role of mutual fund distributors and RIAs and said, “To sustain this growth and to ensure deeper penetration of mutual fund products into all areas of the country, the distributors are expected to play an important role.”

Despite a growth in the number of women mutual fund managers in the past one year, they represent an abysmal 8% of the total fund managers in India, as per a report by Morningstar. Out of a total of 345 fund managers across mutual fund houses in the country, there are just 29 women fund managers who are managing funds either as primary/secondary managers or have oversight as heads of equity/debt. Last year, the number was 24. These 29 women managers handle 15% of the total AUM amounting to approximately Rs 3.41 lakh crore, up approximately 11% from last year. Interestingly, out of the total funds managed by women, three-fourths are debt funds and remaining funds are equity. Though the growth in the women manager presence is pleasing, it is still considerably below global standards with many Asian countries showing amongst the highest representation of women in the mutual fund industry.

Monday, April 22, 2019

April 2019

Assets under management (AUM) of the mutual fund industry stood at Rs 23.79 lakh crore at the end of March 2019, up 11% year-on-year (YoY), according to data released by Association of Mutual Funds in India (AMFI). On a monthly basis, AUM grew 2.73% from Rs 23.16 lakh crore in February 2019. The industry saw net outflows of Rs 22,357 crore in March 2019 as against net outflows of Rs 20,083 crore in February 2019. On a monthly basis, net outflows in the liquid/money market category more than doubled to Rs 51,343 crore from Rs 24,509 crore in February 2019. The rise in net outflows reflects redemptions at fiscal year-end as corporates usually tend to redeem their investments to meet the advance tax payment deadline. After witnessing net outflows of Rs 4,214 crore in February 2019, income category witnessed net inflows of Rs 13,856 crore in March 2019 amid the rate cut scenario, according to the AMFI data. Inflows in equity funds (including equity-linked savings schemes) grew more than 120 percent month-on-month in March 2019 to Rs 11,756 crore. The spike can be attributed to larger flows into tax saving schemes in the last month of the financial year and improved investor sentiment on expectations of getting a stable political mandate in the national elections, in contrast to the possibility of a fractured political mandate. Strong flows from foreign portfolio investors (FPIs) supplemented higher domestic flows, taking the broader equity market index close to record highs in March 2019. Progressive regulations by SEBI like reduction of total expense ratio (TER) and introduction of direct plans have drawn smaller retail investors. Added to that, various initiatives and campaigns by industry body -- AMFI -- like 'Mutual Funds Sahi Hai' seems to have altered the retail investors’ behaviour, who traditionally withdraw funds following a year of negative returns. Net inflows in the other ETF category came in at Rs 10,540 crore in March 2019 as against net inflows of Rs 5,234 crore in February 2019. However, net outflows in the balanced category came in at Rs 3,181 crore as against net outflows of Rs 1,077 crore in February 2019. Quarterly average assets under management in the March quarter stood at Rs 24.47 lakh crore, up from Rs 23.62 lakh crore in the December quarter.
Despite a challenging FY19, the 43-player mutual fund industry saw net inflows of Rs 1.10 lakh crore. However, the net inflows more than halved from the Rs 2.71 lakh crore registered in FY18, according to the data on the Association of Mutual Funds in India (AMFI). Fund managers attribute the fall in net inflows to lower inflows in the equity fund and outflows from debt categories. Inflows into equity funds (including ELSS and others) fell by 37% from Rs 1.71 lakh crore in FY17-18 to Rs 1.07 lakh crore in FY18-19. Asset managers claimed slower inflows in equity schemes could be on the back of volatile equity markets in FY19. Amid intermittent bouts of volatility during FY19, Sensex gained 18.77%. They also pointed out that the correction in mid and small cap segment and market concerns over NBFC credit events may have led to a negative impact on flows in the last financial year. The outflows from debt funds (including income and gilt funds) shot up to Rs 1.25 lakh crore in FY19 as against Rs 9,128 crore registered a year ago. Fund officials attributed the rise to the credit event in September 2018, tightness in liquidity, interest rate hikes by RBI in the early part of FY19 which led to a lower interest in debt funds. In September last year, IL&FS had defaulted on repayments. Presence of IL&FS and its subsidiaries in the portfolios of debt funds had led to a sharp fall in their net asset values, prompting investors to pull out their investments from debt funds. Liquid funds, which witnessed outflows in the last six months of FY19 managed to end the year with net inflows. In FY19, this category registered net inflows of Rs 76,000 crore. In comparison, liquid funds had registered net outflows of Rs 2,936 crore in FY18. Liquid fund assets went up by 32% from Rs 4.60 lakh crore to Rs 6.07 lakh crore during the review period. In the last six months of FY19, liquid funds category was the most hit category and had registered significant outflows, particularly after the IL&FS default surfaced in September 2018.

The MF industry has added 1.04 crore folios last fiscal taking the total folio count to 8.18 crore folios as of March 2019, shows SEBI data. Nearly 85% of these folios were in equity funds. Equity folios grew by a healthy 17% from 5.94 crore in March 2018 to 6.93 crore in March 2019. Equity category includes pure equity, ELSS and balanced funds. Compared to FY17-18 when close to 1.6 crore folios were created during the year, there has been some slowdown in folio creation because of volatility in both debt and equity markets. Even then, the year FY 18-19 saw a healthy growth of 15% in total folios largely due to increasing awareness about mutual funds among investors through AMFI’s ‘Mutual Funds Sahi Hai’ campaign. Liquid (51%), other ETF (42%) and fund of funds investing overseas (OFoFs) (33%) saw strong growth last fiscal. While the ETF category benefitted from strong investor interest in PSU divestment offerings by the government through CPSE ETF, liquid funds saw increased participation due to volatility in debt markets. On the other hand, though the growth in overseas FoFs folios is high in percentage terms, the industry saw addition of 31,358 new folios last fiscal. Overall, barring gilt funds and gold ETFs, all categories saw growth last fiscal. The slowdown in gold ETFs can be attributed to introduction of sovereign gold bond fund and relative stagnancy in gold prices. The expectations of tighter monetary policy and QE tightening by developed economies led to lower interest in gilt category.

An analysis of quarterly AUM of 39 fund houses shows that HDFC MF, ICICI Prudential MF and Reliance MF are the top three fund houses in terms of equity AAUM. While HDFC MF boasts a market share of 15% with equity AUM of Rs.1.58 lakh crore, ICICI Prudential MF has 14% share with equity AUM of Rs.1.46 lakh crore and Reliance MF 9% with equity AUM of 91,354 crore, as on March 2019. Equity AAUM includes equity funds, ELSS and balanced funds. Even in FY 2017-18, these three fund houses topped the list in terms of equity AAUM. However, there has been a change in the fourth and fifth positions from the last financial year. SBI MF with 8.8% market share and equity AUM of Rs.90,268 crore has now become the fourth largest AMC in terms of equity AAUM. It replaced Aditya Birla Sun Life MF that has 8.7% market share and equity AUM of Rs.89,062 crore as on March 2019. ABSL MF slipped into the fifth spot primarily due to outflow from its balanced funds. Among the top ten fund houses in terms of equity assets, SBI MF was the major gainer last fiscal in absolute terms. The fund house added Rs.16,123 crore to its equity AUM kitty in the last one year ending in March 2019. Axis MF and Kotak MF followed SBI MF in terms of growth in equity AUM in absolute terms. Overall, the top ten fund houses account for 80% of the total equity AUM. Further, if we look at the top 15 fund houses in terms of equity assets, Tata MF replaced Motilal Oswal MF to make to the top 15.

AMFI’s latest data shows that SIP contribution of the Rs.23 lakh crore mutual fund industry has increased from Rs.67,190 crore to 92,693 crore, a growth of over 38% in just a year. Also, the SIP AUM grew by Rs.68,077 crore in the last financial year from Rs.1.99 lakh crore in March 2018 to Rs. 2.67 lakh crore in March 2019. SIP AUM now accounts for 11% of the total industry AUM. Several factors came together to drive the SIP success story. Demonetisation at the end of CY 2017, lower bank interest rates, financialisation of savings and AMFI’s ‘Mutual Funds Sahi Hai’ campaign have all contributed to generate interest in SIPs. On a more subdued note, the growth in the number of SIP accounts declined in FY 18-19 compared to FY 17-18.  While FY 17-18 had 30% SIP closure (No. of SIPs discontinued/No. of new SIP registered), FY 18-19 saw 54% SIP closure. Increase in SIP closure is a result of market uncertainty. The scale of flows is influenced by market direction. The current trend may continue for a few more months but SIP flows will normalise once markets stabilise. Analysis of SIP data shows that closure is higher among direct investors compared to regular plan investors as there is no one to hand-hold them through volatile markets. Previously many major banks recommended 1-2 year SIPs. This trend is now changing to perpetual SIPs, which will lead to lower closures in the coming years.

Piquant Parade

Reliance Capital has invited Nippon Life Insurance to acquire up to 42.88% stake that Reliance holds in their joint venture (JV), Reliance Nippon Life Asset Management (RNAM). Nippon Life Insurance holds 42.88% stake in RNAM and if the deal goes through, Japan's Nippon Life will hold 85.76% stake in the AMC. The deal may also trigger an open offer as it will result in a change of ownership. As per the Securities and Exchange Board of India's (SEBI's) takeover code regulation, the open offer has to be made to public shareholders of Reliance Nippon Mutual Fund who hold 14.25% stake. Since the deal will involve a change of control, the stake sale may happen at a premium to the current market price. As at the end of December 2018 the asset under management of RNAM stood at Rs 2.27 lakh crore. Reliance Nippon Life AMC reported a net profit of about Rs 110 crore in the quarter ended December 31, 2018. The company earned about Rs 350 crore in revenue from operations for the third quarter.

India’s largest mutual fund distributor NJ India has applied for the mutual fund license with SEBI. The company does not have any fund house accquistion plans. Instead they are considering the business to be an extension of their distribution business. In the first three months of Calendar Year 2019, three new players including NJ India have shown their interest in mutual fund business. The other two who showed their interests in mutual fund business are SREI and Karvy Stock Broking. Apart from these three companies, Geojit Financial Services, Samco Securities and Equity Intelligence India applied in 2018 for SEBI’s nod to get into mutual fund business. Last year, Trust Investment Advisors and Muthoot Finance got the SEBI in-principle approval to start their asset management business.

…to be continued

Monday, April 15, 2019

April 2019

The lone NFO from Indiabulls Mutual Fund adorns the April 2019 NFONEST.

Indiabulls Nifty 50 Exchange Traded Fund
Opens: April 8, 2019
Closes: April 22, 2019

Indiabulls Mutual Fund has launched a new open ended scheme tracking the Nifty 50 Index. The investment objective of the scheme is to provide returns that closely correspond to the total returns of the securities as represented by the underlying index, subject to tracking error. The performance of the scheme will be benchmarked against NIFTY 50 Total Return Index. As Indiabulls Nifty 50 ETF will replicate the diversified Nifty 50 Index, the scheme will invest in large cap equities across multiple sectors. Equity investments including derivatives of the new fund will range from 95 to 100%, while the remainder, accounting for up to 5% of assets will be invested in various money market and debt instruments. Mr. Malay Shah shall manage the debt portion and Mr. Veekesh Gandhi the equity portion.

SBI Capital Protection Oriented Fund – Series A (Plan 3 and 4), ICICI Prudential Global Advantage Fund, Aditya Birla Sun Life Rural India Fund, Mirae Asset Midcap Fund and Canara Robeco Overnight Fund  are expected to be launched in the coming months.


Monday, April 08, 2019

April 2019

All the GEMs from the 2018 GEMGAZE have been shown the door in view of their lacklustre performance and a set of five completely different funds have been accorded a red carpet welcome in the 2019 GEMGAZE. 

Franklin India Feeder Franklin US Opportunities Fund Gem

Incorporated in February 2012, Franklin India Feeder Opportunities Fund has an AUM of Rs 789 crore. It is a feeder fund and the scheme’s underlying mutual fund, the Franklin US Opportunities Fund, invests a majority of its assets (99.8%) in equity securities of US companies which demonstrate growth at higher levels than the overall US economy. The one-year return of the fund is 18.6% as against the average returns of 21% of the Russel 3000 Growth Index.  The expense ratio of the fund is 1.7%. The fund is efficiently managed by Mr. Srikesh Nair since May 2016.

ICICI Prudential US Bluechip Equity Fund Gem

This Rs. 268 crore ICICI Prudential US Bluechip Equity Fund, incorporated in July 2012, is a relatively recent addition to the foreign funds category. However, even in this relatively short span of time, the scheme has succeeded in emerging as one of the best international funds in India. It has earned a one-year return of 18.58% slightly ahead of the benchmark return of 18.07%. The fund is benchmarked against the S&P 500 TRI.  Equity constitutes 98.3% of the portfolio with FMCG, healthcare and technology forming the top three sectors and the rest of the assets in cash. Thus, the scheme follows a relatively conservative approach when it comes to sector-wise allocation of its funds which helps it in managing its overall risk quotient.  While the portfolio turnover ratio is 63%, the expense ratio is very high at 2.04%. The fund is managed by Mr. Rohan Maru since September 2013 and Ms. Priyanka Khandelwal since June 2017.

DSP US Flexible Equity Fund Gem

DSP US Flexible Equity Fund, incorporated in August 2012, has an AUM of Rs 216 crore. It is a feeder fund and invests in Blackrock Global Funds – US Flexible Equity Fund. The fund invests in equities of issuers with headquarters in a member state of the European economic and monetary union (EMU). The fund management tries to identify current and future market leaders while laying special emphasis on the companies' structural growth and earnings momentum characteristics. 95.73% of the portfolio is made up of equity with the rest in cash. Its one-year return is 14.28% - lower than most of its peers. The expense ratio of the fund is 2.71%. The fund is benchmarked against the Russell 1000 Index. The fund is managed by Mr.Laukik Bagwe since July 2012, Mr. Jay Kothari since March 2013 and Mr. Kedar Karnik since July 2016.

Motilal Oswal NASDAQ 100 Exchange Traded Fund (erstwhile Motilal Oswal MOST Shares NASDAQ - 100 ETF) Gem

Motilal Oswal NASDAQ 100 Exchange Traded Fund, launched in March 2011 sports an AUM of Rs 134 crore. Its one-year return is 21.16%, well ahead of most of its peers. The entire assets allocated to equity are 99.93% with technology, consumer durables and communication being the top three sectors in which the fund’s assets are invested. The expense ratio of the fund is moderate at .05%. The turnover of the fund is a meager 3%. The fund is benchmarked against the NASDAQ 100 TRI. The fund has been managed by Mr. Swapnil P Mayekar since August 2015.

Aditya Birla Sunlife International Equity Fund – Plan A Gem

Incorporated in October 2007, Aditya Birla Sunlife International Equity Fund – Plan A, has an AUM of Rs 60 crore. The one-year return of the fund is 14.05% ahead of the index return of 10.3%. The fund is benchmarked against the S&P Global 1200 Index. The top three sectors are finance, services and healthcare. The equity exposure of the fund is at 94.54%. The portfolio turnover ratio is a towering 103% and the expense ratio is 2.82%.  The fund is managed by Mr. Vineet Maloo since September 2oo7.

Monday, April 01, 2019

April 2019

Geographical diversification…

With people getting increasingly aware of investment options around the world, the need for portfolio diversification is greater than ever. A diverse plan not only spreads the risks, but also taps earning potential of different markets. International funds add an element of geographical diversification to the manifold mutual fund types currently existing in the Indian mutual fund sector. It invests in firms in countries other than the ones they reside. It is also called overseas or foreign funds. International mutual funds follow a master-feeder structure. A master-feeder structure is a three-tier structure where investors place their money in the feeder fund which then invests in the master fund. The master fund then invests the money in the market. A feeder fund is based on-shore i.e. in India, whereas, the master fund is based off-shore (in a foreign geography like Luxembourg etc). A master fund can have multiple feeder funds. Investing in them may mean more risk exposure, but also chances of higher returns. People usually prefer it as an alternative and/or long-term investment.

… the lure!

Smart investors have always been lured towards international funds for several reasons.
– One is diversification.
– Two, economic cycle varies for different countries, and simultaneous investment in different economies ensures minimal loss and possibly, smoother returns.
– Three, exposure to international markets can only broaden your experience and expertise.
In simple words, international funds invest in the international market (equities and/or debt funds). However, they are not for lazy or passive investors as they need careful and continual market research. The investor should be sure of his investment goals, both short-term and long-term, before venturing in.

… the opportunity to invest judiciously!

International funds offer a great opportunity to diversify and invest judiciously by being a part of the growth story of companies around the world.

Better prospects – International funds offer better prospects. These funds invest in global companies. Global companies are good in terms of resources, facilities, standards and government cooperation. You can take advantage from some of the fastest-growing markets in the world.

Currency factor – These funds are highly dependent on fluctuations in international currencies. Any major change in the currency rate adversely impacts the performance of a fund.

Risk factor – Risk factors associated with the international fund is very high. The various risks associated with this fund are country-specific policies, geopolitical risk, market conditions, global economic conditions etc.

Require constant monitoring – Investment in this fund is prone to multiple risks. This fund requires constant monitoring.

Scope for better market returns – The return offered by this fund is likely to be high. It varies according to multiple parameters.

Diversification – The prime objective of this fund is to diversify the investment portfolio of an individual. Majority of such funds invest in different securities in different countries, aiming to have a wide array of investment instruments at their disposal.

International funds of various hues…


Even though they sound synonymous, global funds and international funds are not one and the same. Funds available across the world including the home country are global funds. On the other hand, international funds are those available only in other countries. Though there are no clear sub-categories of the international funds, they are broadly either country-specific international funds, commodity-based international funds or thematic funds that invest in sectors such as consumption, energy, real estate and agriculture.

By Geography-Different international funds invest in different countries and different types of markets. Some schemes such HSBC Emerging Market Fund invest money in HSBC global fund which primarily invests their funds in countries in Asia or Latin America. Mirae Asset China Advantage Fund invests in Mirae Asset China Sector Leader Equity Fund, which itself invests in companies that are domiciled, or have activity in China and Hongkong. Franklin India Feeder-Franklin US Opportunity or ICICI Prudential US Blue-chip Equity Fund invest in blue-chip companies/securities that are domiciled in the USA.

By Sector/Theme- Theme Based Funds or thematic funds invest in a particular theme. For example, if the theme is infrastructure, it would invest in infrastructure construction companies as well as companies related to the infrastructure business like cement, steel, etc. Some theme based funds are DSPBR World Energy Fund, L&T Global Real Assets Fund etc. These funds are for those investors who have already invested in plain vanilla international funds and already invested in domestic equity or funds but now want to buy something exotic.

Commodity Based Funds invest in commodities like gold, precious metals, crude oil, wheat, etc. Commodities offer diversification and also act as an inflation hedge, thus protecting the investors. Also, these funds could be multi-commodity or focused on a single commodity. Best commodity based international mutual funds are DSP Black Rock World Gold Fund, ING OptiMix Global Commodities, Mirae Asset Global Commodity Stocks, Birla Sun Life Commodity Equities - Global Agri Fund, etc.

FoF or direct investment- Some Global funds invest directly in companies abroad. Others are Fund of Funds; these funds collect the corpus from domestic market and invest in an offshore Fund of the same parent company. If the fund purchases the stocks or bond abroad directly, fund manager sits here in India and decides which stock to buy and hold. But, in case of FOF, Indian fund manager just collects or pools the fund from here and invests in their parent fund which is managed by fund manager who is sitting in the domiciled country where the money is invested. A fund manager who is abroad and managing the corpus from there knows the economy very well, and it is easy for them to monitor their own market.

…one up on their counterparts

Geographical Diversification
One country can never top the charts consistently – so even if you do not have a chance this year, there is one, the next year. At a macroeconomic level, most countries have their own economic cycle. Hence, by investing in different countries, you can experience smaller crests and troughs in your returns.

Can contribute to a Cost-Effective Portfolio
You can utilize this exposure to foreign money to meet bigger financial goals (like your child’s wedding or college education). When it comes to overall value, Indian equities do not come cheap. We might have already hit the market high. So, a wisely-picked International Fund can balance this out.

Portfolio Diversification

An investment portfolio has a combination of high, medium and low risk investments. Hence, when there is a market low in the home country, the one abroad can compensate for it.

International Exposure under Expert Management
You may not have adequate knowledge about the foreign country’s economy and the industry there. Here, a qualified intermediary can assist. Therefore, you can gain exposure to global market even if you are not familiar with it.

The report card…

International mutual funds are topping the return charts. The category has returned around 20% in one year. Motilal Oswal NASDAQ 100 Exchange Traded Fund, the topper in the category, has given as high as 27% returns in one year, 18% in three years and 19% in five years. ICICI Prudential US Bluechip Equity Fund has given 20.26% in one year and Reliance US Equity Opportunities Fund has returned 18.45% in the same time frame. Franklin India Feeder Franklin US Opportunities Fund has given 17.83% returns in one year and DSP US Flexible Equity Fund has returned 16.94% in one year. The current scenario underscores why investors need to diversify their portfolio across geographies. International funds open a window of great ideas for Indian investors. International funds are critical in an investor’s portfolio. The allocation can be anywhere between 5-20% depending on the size and needs of a portfolio.  There are diversified equity schemes in India which have an exposure to international schemes but they are limited in number. For example, Parag Parikh Long Term Equity Fund has some allocation to international stocks in their portfolio. However, it is better to opt for a pure international scheme.

Look before you leap…

If you wish to foray into international funds, research well before investing as well as during the term of holding the investment.

·         Understand the investment objective of the fund and associated risks.
·         Check the track record of the fund.
·         Look for experienced fund manager.
·         Make sure that the scheme you choose complements your current portfolio.
·         Read the fund facts carefully for the underlying cost and expenses.
·         Check if the country you choose has a tax treaty with India to avoid double taxation.
·         Do extensive research and if required take help from experts.

Opt for international funds

·         If you have surplus money after investing for the financial goal.
·         You are willing to invest surplus money for long term.
·         Your risk-taking capacity is very high.
·         You are not a passive investor and cautious about tracking your investments.

The bottomline…

While any kind of investment involves risk, investing in international funds presents unique risks including political, currency, regulatory and economic. The key is for the investors to do their homework and understand where the investment’s exposure will be. Understanding political risks can also be important before making any investment decision. To be vigilant, investors should set a target, monitor the allocation, and continually rebalance while keeping an eye on any developments within the portfolio. International mutual funds may not fit with a conservative person’s investment portfolio, but looking outside their domestic market may reward those investors seeking additional returns especially as global trade continues to expand and the world’s economies grow. Despite short-term volatility, historically, international equity markets have had favorable prospects for continued growth. International mutual funds can capitalise on that potential.