FUND FULCRUM (contd.)

May 2021

The total assets of mutual funds reached 21% of the total bank deposits in FY21, up from 17.7% in the last fiscal. While the total bank deposits stood at Rs 151.13 lakh crore, the MF AUM was at Rs 32.17 lakh crore at the end of March 2021, according to AMFI data. This is the highest MF AUM to bank deposit ratio at the end of any fiscal year. Annual contribution of household savings in mutual funds is declining every year since 2017. In fact, it has come down drastically from 9.3% in FY 2017 to 1.9% in FY 2020, according to the Research Report published by Aditya Birla Sun Life Mutual Fund in its red herring prospectus. The report shows that the annual contribution of Indian household savings in mutual funds was Rs.1.50 lakh crore in FY 2017 i.e. 9.3% of the total annual contribution of Indian household in financial markets. Since then it has been declining. In FY18, households invested Rs.1.38 lakh crore or 6.7% of their savings in mutual fund schemes. The next year, they slashed it down further to Rs.57,600 or 2.7% of the total household savings. From Rs 1.50 lakh crore in FY17, the yearly inflow of financial household savings in mutual funds declined to Rs 44,400 crore in FY20.

Regulatory Rigmarole

SEBI's latest norms on remuneration of key employees in which it has asked AMCs to pay 20% of the total net salary in the form of MF units and the weighted AUM concept has not gone down well with a few AMC officials and MFDs. While lauding SEBI's intention behind the move, some AMCs questioned the practicality of the decision. The lock-in of 20% income for three years may cause difficulties for key employees who do not earn high salaries. The weighted AUM concept was the other issue, where the fund manager has to invest in all schemes on the basis of weighted AUM. So, if a mutual fund runs an 80-20 debt equity business, it will be forced to maintain this asset allocation irrespective of the risk appetite of the fund. In addition, for a fund manager managing small cap fund, he has to invest either in his schemes or a higher risk grade scheme, say for instance, sectoral fund even if he is not comfortable with it. If a person runs a high-risk scheme it does not mean that he has high risk appetite. Transparency is required but this does not seem to be the right way. A liquid fund manager would not like to lock-in his money in liquid funds for three years and a midcap scheme may not be suitable for a midcap fund manager nearing retirement.

Nominees or legal heirs are entitled to get trail commission on assets built before the demise of an ARN holder without obtaining a fresh ARN. However, if a nominee wants to do fresh business or generate trail income on SIP inflows, he has to obtain the new ARN and transfer assets of deceased distributor. In an email sent to a few distributors, AMFI said, “The guidelines issued earlier dated March 28, 2013 with regard to payment of trail commission to nominee or legal heir of the deceased distributors have not been changed. A nominee or legal heir need not be an ARN holder to claim and receive the upfront and trail commission. However, for transfer of AUM, the nominee or legal heir of the deceased ARN holder must have a valid ARN in his name. The latest circular provides the detailed procedure to be followed for transfer of AUM of a deceased ARN holder to the ARN of the nominee/legal heir of the deceased.” With this, if a nominee or legal heir opts not to obtain ARN, he will continue to get trail commission on assets built before the demise of deceased distributor. Also, such nominees will get commissions even if the ARN gets expired at a future date. In such a scenario, nominees continue to receive commissions till the AUM under the ARN becomes nil i.e. till investors remain invested. On the other hand, if a nominee or legal heir obtains ARN, he can grow business through existing assets, fresh business and SIP inflows. Currently, nominees are allowed to transfer the assets. In order to transfer AUM of a deceased MF distributor to the ARN of nominee or legal heir, the ARN of deceased distributor has to be valid on the date of demise and his trail commission should not have been suspended. In addition, the nominee or legal heir must have a valid ARN and be KYD compliant as on the date of request of such a transfer. The new distributor will have to submit his annual declaration of self-certification (where applicable) due as on the date of request of transfer of AUM. AMFI gives six months to nominee or legal heir of a deceased mutual fund distributor to obtain ARN. In both the cases, the nominee or the new distributor has to submit an application for cancellation of ARN of deceased distributor to CAMS-AMFI unit within 6 months of the date of demise.

 

Mutual fund business is buzzing with new entrants even as many firms await SEBI nod to enter the industry. This month, mutual fund industry saw the entry of two new players — Groww and NJ Mutual Fund. While Groww took the M&A path by acquiring Indiabulls, NJ Mutual Fund made its entry by obtaining license from SEBI. Groww’s acquisition of Indiabulls is subject to SEBI’s approval but there is a good chance that the deal will get SEBI’s nod. Another fund house in the offing is White Oak which acquired Yes AMC subject to regulatory approval. And this is just the start. Many firms (almost 10) are waiting for SEBI's go ahead. A large chunk among them are PMS and fintech firms like Zerodha, Helios Capital Management, Capitalmind, Unifi Capital and Rakesh Jhunjhunwala's Alchemy Capital. Paytm Money is also said to be considering the option. There is a combination of factors behind the surge in interest in mutual fund business. Investors are flocking to capital markets as returns from traditional investment avenues dries up. Record opening of demat accounts and high SIP registration numbers are a testimony to the fact. These firms are looking to capture this change in investment pattern. They are also seeing high growth potential as the penetration is low. Technology and internet penetration are now present to reach out to the remaining population. We are already witnessing a shift from regular to direct plans because of low cost — this will intensify further. This solves the distribution challenge for mutual funds. Further, it is a high margin business which is also an opportunity for the new players to innovate from the business perspective.

FUND FULCRUM

May 2021

The financial year 2020-21 ended on a positive note for the mutual fund industry. Despite the pandemic, the industry has added 20 lakh new investors and the average AUM of the industry has grown by 30% to Rs.32 lakh crore. The mutual fund industry has added 5.15 lakh new investors in March 2021 taking the total count of unique investors to 2.27 crore in March 2021 as against 2.07 crore in February 2021. The industry’s total folio count has risen to 9.79 crore in March 2021 from 9.62 crore in February 2021. Overall, gross redemptions have come down significantly to Rs.8.73 lakh crore in March 2021 from Rs.15.25 lakh crore in March 2020. However, it has risen on a monthly basis from Rs.5.97 lakh crore in February 2021. After witnessing net outflows for nine consecutive months, equity funds have finally seen net inflows of Rs.9,115 crore in March 2021. On the contrary, debt funds have witnessed net outflows of Rs.52,528 crore in March 2021 as compared to net inflow of Rs.1,734 in February 2021 largely due to redemption from liquid funds. T30 cities have Rs.26.07 lakh crore (83%) of industry’s total AUM while B30 cities have AUM of Rs.5.36 lakh crore. AUM in T30 cities has grown by 39% from March 2020 to Rs.26.07 lakh crore in March 2021 from Rs.18.71 lakh crore in March 2020. Similarly, AUM in B30 cities has risen by 51% to Rs.5.36 lakh crore in March 2021 as against Rs.3.55 lakh crore in March 2020. Average AUM per retail folio has increased by 33% to Rs.1.77 lakh in March 2021 from Rs.1.33 lakh in March 2020. Average AUM per folio of retail investors in both B30 and T30 cities has risen by 35% and 33% to Rs.1.04 lakh and Rs.2.30 lakh in March 2021 from March 2020, respectively. 1,400 individuals have joined the mutual fund distribution business in March. 5,438 ARNs were renewed in March– 3,396 individual distributors, 183 corporates and 1,857 corporate employees. Maharashtra holds the top position in terms of new ARN and EUIN registration with 25.29% followed by Gujarat (12.26%) and Uttar Pradesh (8.35%)

 

The mutual fund industry has witnessed net inflows across categories at the start of new financial year. Overall, the mutual fund industry has witnessed net inflows of over Rs. 92,906 crore led by huge inflows in debt schemes. Overall, equity schemes have witnessed net inflows of Rs.3,437 crore in April 2021. However, net inflows have decreased from Rs.9,115 crore in March 2021. All equity funds except multi cap funds, ELSS, value funds and dividend yield funds have registered net inflows. Sectoral funds have seen the highest net inflows of Rs.1,705 crore followed by mid cap funds with net inflow of Rs.958 crore and large and mid cap funds with net inflow of Rs.707 crore. Number of folios in equity funds has risen by 7 lakh to 9.85 crore in April 2021. Debt funds have witnessed net inflows of Rs.1 lakh crore in April 2021 after net outflows of Rs.52,528 crore in the last month. Significant inflows in debt schemes were due to inflows in liquid funds of Rs.41,507 crore followed by money market funds with net inflows of Rs.20,286 crore. Overnight funds, ultra-short duration funds, low duration funds, floater funds and gilt funds have also witnessed net inflows of Rs. 8,918 crore, Rs. 9,322 crore, Rs. 3,351 crore and Rs. 1,647 crore respectively. On the other hand, the industry has witnessed net outflows in dynamic bond funds, corporate bond funds, credit risk funds, banking and PSU funds and gilt fund with 10-year constant duration. Inflows in hybrid funds have increased to Rs.8,641 crore in April 2021 from Rs.6,210 crore in March 2021. Inflows were led by arbitrage funds with net inflows of Rs.7,245 crore followed by dynamic asset allocation funds with net inflows of Rs.1,700 crore. However, balanced hybrid funds and equity savings fund witnessed net outflows. Gross monthly inflows through SIP came down to Rs.8,590 crore in April 2021 from Rs.9,182 crore in April 2020. SIP folios have grown to 3.79 crore in April 2021from 3.72 crore in March 2021. Overall, SIP AUM has increased to Rs.4.34 lakh crore as compared to Rs.4.27 lakh crore in March 2021. Overall, the mutual fund industry has witnessed net inflow of over Rs. 92,906 crore. The total industry AAUM has grown marginally to Rs.32.42 lakh crore in April 2021 from Rs.32.17 lakh crore in March 2021 largely due to inflows in debt schemes.

 

A review of the AUM report for the quarter ended March 31, 2021 reveals that HDFC MF, SBI MF and ICICI Prudential MF take the first three spots respectively in terms of the average AUM (AAUM) in the debt category. Debt AUM comprises assets from liquid fund/money market fund/floater fund, gilt fund and income/debt oriented funds. HDFC MF topped the list with debt AAUM of Rs. 2.33 lakh crore, which was closely followed by SBI MF’s debt AAUM of Rs. 2.22 lakh crore and ICICI Prudential MF’s debt AAUM of Rs. 2.17 lakh crore. Aditya Birla Sun Life MF and Kotak Mahindra MF occupied fourth and fifth place, respectively. Their respective debt AAUMs stood at Rs. 1.70 lakh crore and Rs. 1.33 lakh crore. Nippon MF, IDFC MF, Axis MF, UTI MF and DSP MF occupied the next five spots.

 

ICICI Prudential MF has the highest direct equity AUM in the mutual fund industry, according to an analysis of monthly AUM disclosure of 30 fund houses. Of the total equity assets of Rs. 97,700 crore, direct equity AUM of the fund house accounts for Rs. 34,000 crore as on March 2021, which is 35% of the total equity assets. HDFC MF and Axis MF follow ICICI Prudential MF in terms of direct equity assets with AUM of Rs. 29,630 crore and Rs. 25,462 crore, respectively. While HDFC MF’s direct equity AUM accounts for 30% of its total equity assets, direct equity assets of Axis MF was 26% of its total equity assets as of March 2021. Next is Kotak Mahindra MF with direct equity AUM of Rs.24000 crore. India’s largest fund house, SBI occupies fifth spot in direct equity AUM with assets of Rs. 23,000 crore. In terms of proportion of direct AUM to the total assets of the fund house, SBI MF tops the chart among top ten fund houses with 58% of its assets coming from direct plan. Of the total assets of Rs.5 lakh crore, the fund house has direct AUM of 2.9 lakh crore. HDFC MF (46%), ICICI Prudential MF (44%), Aditya Birla Sun Life MF (51%) and Nippon India MF (55%) also have a similar share of direct plans in their total AUM. Among the top 30 fund houses, PPFAS MF has the highest direct plan AUM to total AUM ratio at 70%. UTI MF, Mirae Asset MF, Franklin Templeton MF, Sundaram MF, Edelweiss MF, Canara Robeco MF, BNP Paribas MF and Principal MF have comparatively lower dependence on direct plans. Their direct plan AUM to the total AUM ratio was less than 35%. The market share of direct schemes, which was reportedly around 40% in 2009 has risen to 46% in March 2021. SIP accounts under regular plan SIPs may be surviving longer than direct plan SIPs. An analysis of AMFI data shows that 2% of the total SIP accounts in direct plans are over 5 years old as compared to 10% in regular plans. In absolute terms, of the total 90 lakh SIP accounts under direct plan, close to 2 lakh SIPs are over 5 years older. On the other hand, SIPs under regular plans have a better longevity. Of the total 2.80 crore accounts, 27 lakh SIP accounts are older than 5 years. 48% of the total SIP accounts or 43 lakh SIP accounts under direct plans are older than one year. Of the total 2.8 crore accounts, 72% or 2 crore SIP accounts under regular plans are continuing for more than a year. As of March-end 2021, there were around 90 lakh SIP accounts in direct plans. This is 24% of the total SIP accounts. With 2.80 crore accounts, regular plan SIPs have 76% share in the total SIP accounts. A look at the overall SIP figures, including direct and regular gives us a better idea of the longevity of SIPs. Data shows that 8% of the total SIP accounts are over 5 years old. In absolute terms, 29 lakh SIP accounts out of the total 3.70 crore accounts are more than 5 years old. 

 

SBI Mutual Fund, HDFC Mutual Fund and ICICI Prudential are the top three fund houses in terms of B30 penetration as on March 2021, according to an analysis of the monthly average assets under management (AAUM) disclosure of the top 25 fund houses. With assets of Rs.1.12 lakh crore, SBI MF has the highest penetration in B30 cities in absolute terms. The report shows that 22% of its total assets was in B30 location. HDFC MF and ICICI Prudential MF followed SBI MF with assets of Rs. 61,100 crore, and Rs. 57,300 crore, respectively. Aditya Birla Sun Life MF and UTI MF occupied the fourth and fifth positions with average AUM of Rs. 43,700 crore and Rs. 43,300 crore, respectively. Nippon India MF (Rs. 41,200 crore), Axis MF (Rs. 35,700 crore), Kotak Mahindra (Rs. 21,000 crore), DSP MF (Rs. 13,300 crore) and Franklin Templeton MF (Rs. 13,000 crore) occupied the next five spots. In percentage of assets from B30 location, UTI MF has the highest penetration among top ten fund houses with 23% of its assets coming from small cities and towns. Overall, Sundaram MF has the highest percentage of its assets in B30 location with 26% of its assets coming from such locations. Canara MF and Baroda MF followed Sundaram with B30 penetration of 25% and 24% of their total assets, respectively. B30 AAUM comprises equity, debt, balanced schemes, exchange traded fund (gold & others), and fund of funds investing overseas. Overall, B30 cities have accounted for 5.15 lakh crore or 16% of the total MF assets on March 2021. The share of equity and debt in the total B30 AAUM was Rs. 2.92 lakh crore and Rs. 1.64 lakh crore respectively, which formed around 57% and 32%. ICICI Prudential MF was at the top with B30 equity AAUM of Rs. 35,700 crore.

 

Of the total 9.79 crore folios in the MF industry, retail investors held 8.97 crore folios or 90% of the total folios in the MF industry, shows an analysis of AMFI industry data. Currently, the MF industry has in total 2.30 crore unique investors. The share of retail investor accounts was the highest, followed by HNI and institutional investor accounts. Equity-oriented schemes topped in terms of the number of folios with a share of around 68%. They were followed by hybrid schemes and ETFs which contributed around 10% and 6% respectively in the total number of mutual fund accounts. Debt-oriented scheme including gilt took the next spot with around 6% share in the total number. Retail investors held the highest number of accounts across all schemes. While they hold 93% of the total equity folios, their share in debt scheme folios was 64%. Dividing assets managed by the number of accounts for a scheme category gives the average AUM per folio of that scheme. The average AUM per folio of the MF industry was Rs. 3.21 lakh. It was the highest for liquid/money market schemes at around Rs. 18.19 lakh. Debt-oriented schemes including gilt had the second-largest average ticket size of Rs. 15.49 lakh. Notably, both these schemes derived significant shares of their assets from institutional investors. ETFs, FOFs and hybrid schemes have the next largest average ticket of Rs. 4.84 lakh and Rs. 3.64 lakh, respectively. These were followed by index funds where the average AUM per folio stood at Rs. 1.89 lakh. The average AUM per folio of equity-oriented schemes was Rs. 1.50 lakh.  Average AUM per folio of retail investors and HNIs in the MF industry was Rs.71,000 and 9.17 lakh, respectively. AMFI report also suggests that equity assets have a longer average holding duration than their non-equity counterparts. 43.6% of the industry’s equity assets were held for more than 24 months of which 55.3% was held by retail investor.

 

 

 Piquant Parade

 

India's largest mutual fund distributor NJ India Invest has received SEBI’s final go ahead to launch mutual fund business in India, NJ India Mutual Fund. The fund house is yet to apply for SEBI's approval for launching a mutual fund scheme. Headquartered in Surat, NJ India Invest is India's largest mutual fund distributor. The company was started by Neeraj Choksi and Jignesh Desai in 2003.

 

Online investment platform Groww is about to enter the mutual fund business. The digital platform has signed a deal to acquire Indiabulls Mutual Fund for Rs 175 crore. The deal includes a cash equivalent of Rs 100 crore and is subject to regulatory approvals by SEBI. The billion-dollar startup expects the deal to conclude by June 30, 2022. If the deal gets regulatory approval, Groww will become the first fintech player to enter the asset management space. Groww claims it has 15 million users, with 250,000 SIPs opened every month on its platform. As of March 2021, Indiabulls MF was managing assets worth Rs 664 crore.

 

To be continued…

 

NFONEST

May 2021

Three NFOs of various hues are open at present and find a place in the May 2021 GEMGAZE.   

Tata Dividend Yield Fund

Opens: May 3, 2021

Closes: May 17, 2021

Tata Mutual Fund has launched its new fund offer – Tata Dividend Yield Fund, an open ended mutual fund scheme. The primary investment objective of the scheme is to provide capital appreciation and/or dividend distribution by investing predominantly in a well-diversified portfolio of equity and equity related instruments of dividend yielding companies. The scheme’s performance will be benchmarked against NIFTY Dividend Opportunities 50 Total Return Index. It will be managed by Mr. Sailesh Jain, Mr. Rahul Singh, Mr. Venkat Samala and Mr. Murthy Nagarajan.

Parag Parikh Conservative Hybrid Fund

Opens: May 7, 2021

Closes: May 21, 2021

Parag Parikh Mutual Fund has launched its new fund offer – Parag Parikh Conservative Hybrid Fund, an open ended balanced mutual fund scheme. The primary investment objective of the scheme is to generate regular income through investments predominantly in debt and money market instruments. The scheme will adopt a flexible model that will allow the fund manager to move between accrual and duration related instruments. These include the sovereign, state government, PSU and corporate securities across all maturities. The fund will have 10 to 25% exposure in equity and equity-related instruments. The allocation can be increased or reduced using arbitrage. The scheme will also be able to invest up to 10% of its asset in units of REITs and InvITs. The performance of the scheme will be benchmarked against CRISIL Hybrid 85+15 – Conservative Index TRI. Mr. Rajeev Thakkar, Mr, Raunak Onkar and Mr. Raj Mehta will manage the scheme.

Axis Global Innovation Fund of Fund

Opens: May 10, 2021

Closes: May 21, 2021

Axis Mutual Fund has launched ‘Axis Global Innovation Fund of Fund’. The fund will invest in Schroder International Selection Fund Global Disruption, an equity fund that invests in companies worldwide that benefit from disruption. The underlying fund is actively managed to access multiple disruption themes globally including environment, automation and healthcare among others. The scheme’s performance will be benchmarked against MSCI AC World Index Net Total Return Index. It will be managed by Mr. Hitesh Das (for Foreign Securities) and Mr. R. Sivakumar (For Debt portion).

UTI Focused Equity Fund, Baroda Business Cycle Fund, Kotak Nifty Alpha 50 ETF, Kotak Nifty 100 Low Volume 30 ETF, Navi Nifty Index Fund, Nippon India Taiwan Equity Fund, Mahindra Manulife Flexicap Yojana, IIFL Global Innovation Fund, Kotak AAA Bond Plus SDL ETF – 2026 Maturity, Kotak AAA Bond Plus SDL ETF – 2031 Maturity, Aditya Birla Sun Life Nifty Healthcare ETF, Kotak Enhanced Equity Fund, Aditya Birla Sun Life Nifty IT ETF and Aditya Birla Sun Life Financial Services ETF are expected to be launched in the coming months.

 

GEMGAZE

May 2021

Three of the five GEMs from the 2019 GEMGAZE have been shown the door in view of their lacklustre performance and a set of three different funds have been accorded a red carpet welcome in the 2021 GEMGAZE. 

DSP US Flexible Equity Fund Gem

DSP US Flexible Equity Fund, incorporated in August 2012, has an AUM of Rs 373 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. 96.7% of the portfolio is made up of equity with the rest in cash. Its one-year return is 52.72% - higher than most of its peers. The expense ratio of the fund is 2.46%. The fund is benchmarked against the Russell 1000 Total Return 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 3203 crore. Its one-year return is 47.56%, well ahead of most of its peers. The entire assets allocated to equity are 100% with technology, consumer durables and services being the top three sectors in which the fund’s assets are invested. The expense ratio of the fund is moderate at 0.59%. The turnover of the fund is a meager 10%. The fund is benchmarked against the NASDAQ 100 TRI. The fund has been managed by Mr. Herin Visaria since July 2019.

Kotak Global Emerging Market Fund Gem

Incorporated in September 2007, Kotak Global Emerging Market Fund has an AUM of Rs 128 crore. The fund invests a greater proportion of assets in overseas mutual funds investing in globally emerging markets funds. T. Rowe Price SICAV, (TGEMF) which is a Luxembourg domiciled Fund, has been identified by Kotak Mutual Fund as the portfolio for the purpose of Kotak Global Emerging Market Fund. The fund invests 97.3% in equity. The one-year return of the fund is 54.71%, quite ahead of its peers. The expense ratio of the fund is 1.64%. The fund is benchmarked against the MSCI Emerging Markets Index. The fund is efficiently managed by Mr. Arjun Khanna since May 2019.

PGIM India Global Equity Opportunites Fund Gem

This Rs. 865 crore PGIM India Global Equity Opportunities Fund, incorporated in May 2010, 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 53.39% slightly ahead of its peers. The fund is benchmarked against the MSCI All Country World TRI.  Equity constitutes 99.8% of the portfolio with the entire assets invested in PGIM Jennison Global Equity Opportunities Fund. The expense ratio is very high at 2.7%. The fund is managed by Mr. Alok Agarwal since July 2017.

Principal Global Opportunities Fund Gem

Incorporated in March 2004, Principal Global Opportunities Fund has an AUM of Rs 27 crore. The one-year return of the fund is 71.76% well ahead of its peers. The fund is benchmarked against the MSCI ACW Small Cap Index. The equity exposure of the fund is at 99.3% with the entire assets being invested in PGIF Origin Global Smaller Companies Fund. The expense ratio of the fund is 1.44%. The fund is managed by Mr. Rajat Jain since March 2004.

 

 

FUND FLAVOUR

May 2021

International/Global Funds

With the awareness levels of Indians about investment options around the world increasing by leaps and bounds, the need for portfolio diversification is greater than ever. A diverse plan not only mitigates risks by spreading the risks across a mix of assets and markets but also taps the earning potential of different markets. Global investments offer the opportunity to invest in larger or fast-growing economies and even specific stocks or sectoral opportunities that are not present in India and helps boost the quality of the portfolio. Indian markets have lower correlation with international markets. According to a report by Mirae Asset Mutual Fund, Indian markets have a low correlation of 0.16% with the US, 0.32% with Europe and 0.38% with China. So by investing in international mutual funds that invest in the above-mentioned markets, the overall portfolio risk will be less. International funds give investors several opportunities in new age industries like ecommerce, social media, electric vehicles, cyber security and cloud computing among others. Amazon, Netflix, Facebook, Twitter, Louis Vuitton, Walmart and Tesla have been outperformers over the last few years. So by investing in International funds, exposure to these stocks is made possible. Many global companies have strong moats and competitive advantages that many Indian companies lack. Investing in them gives an automatic hedge against the rupee. Further, they help diversify portfolio risk at the country and currency level. Expanding the portfolio to global investments also ensures better risk-adjusted returns and international exposure under expert management.

 

However, despite its many advantages, a majority of Indian investors shy away from investing globally. Global investing is not as complicated as it seems and can help you achieve a well-diversified portfolio. But all these advantages come with a fair amount of risks - risk of volatility in currency exchange rates, difficulty in accessing information on how the companies linked with those funds are performing, any regulatory or change in business plan happening, etc., and economic and political changes of those countries. Moreover, international funds are taxed as debt funds unless 65% of their assets are held in Indian equities. Short-term Capital Gains (for a holding period of 36 months or less) will be taxed as per the tax slab (as per the marginal rate of taxation), while Long-term Capital Gains (for a holding period of 36 months or more) will be taxed at 20% with indexation benefit.

 

The modus operandi…

There are four ways in which Indians can invest in global markets: Direct Investments, ETFs, Global Mutual Funds, and Fund of Funds. Investors need to open a separate trading and demat account with an international company or maintain an international broking account with an Indian company for direct investments and ETFs. Investing internationally via mutual funds and FoF seems like the most convenient routes to access global opportunities. While global mutual funds and international funds are often used interchangeably, there is a slight difference between the two. International funds invest in countries other than the domestic market, while global mutual funds invest in all the countries across the globe (including the domestic market). These funds offer the advantage of being able to access global companies through domestic fund houses and also the expertise of leading fund managers across the globe. In the case of an international FoF, investments are made in a mutual fund managed by an international fund house that invests in shares and bonds of global companies. The fund manager selects a FoF which aligns with the risk profile and investment philosophy of the scheme. One can invest in these funds without the need to open a separate overseas trading account. Small investors can also access these funds. Allocating a small percentage of the portfolio to global mutual funds can be a wise strategy to reduce volatility, manage risk and diversify the portfolio in the true sense.

 

Overseas investment limits enhanced…

The capital market regulator, SEBI through a circular dated November 5, 2020, enhanced the overseas investment limits applicable to mutual funds from US$ 300 million to US$ 600 million per mutual fund without making any change to the industry-level limit of US$ 7 billion. Currently, the Indian mutual fund has collectively exhausted just about 13% of the industry-level limit of US$ 7 billion despite the growing popularity of overseas funds. SEBI has also increased the ceiling on mutual fund investments in overseas Exchange Traded Funds (ETFs) to US$ 200 million from US$ 50 million earlier but kept the industry limit unchanged in this regard at US$ 1 billion. For ongoing schemes that invest or are allowed to invest in overseas securities/overseas ETFs, an enhanced investment headroom of 20% of the average AUM in overseas securities/overseas ETFs of the previous three-calendar-month exposure to overseas securities/overseas ETFs for that month is permitted by regulator subject to the maximum specified limits. Mutual funds investing in the overseas markets will have to mention the amount they intend to invest overseas in their scheme documents. Moreover, the utilization of overseas investment limits is required to be reported in the monthly statement within 10 days from the end of each month. If such limits remain unutilized for six months, it will be available for other fund houses to utilise.

 

Zeroing in on the right funds…

Assets in international schemes available through domestic mutual funds have seen a sharp rise over the last one year. The number of folios rose 250% to 7,00,000 in March 2021 as against 2,00,000 in April 2020. During the same period, the assets under management rose 278% to Rs 12,408 crore from Rs 3,282 crore. With 46 international funds to choose from, over the past one year, the top three funds have delivered 97 percent returns. DSP World Mining Fund, a scheme that invests in equity shares of gold-mining companies, gave 95 percent return over the past one year. It is among the five best international funds over this period. But the bottom three funds have given just 26 percent on an average. Of the 14 international funds that have a 10-year performance record, only four have delivered annualized returns greater than 10 percent. HSBC Brazil Fund was launched with great expectation nearly 10 years ago. Its performance languished for a good part of that period. As of August 2020, it was down 23 percent. A fund investing in Greater China Equities or US tech stocks could have delivered returns in excess of 20 percent annually, five or six years ago. But countries go through their own cycles of boom and bust and that may not coincide with how the Indian economy or markets perform.

 

Just as with investments in Indian equity funds, for overseas schemes, too, it is important that you buy and hold for at least 5-10 years. Choose well-diversified portfolios and investment themes when it comes to international funds. For example, globally diversified schemes or those investing in broad-based US equities or European stocks can be considered. Such portfolios will have a large and liquid basket of listed securities for portfolio construction. Schemes that invest elsewhere in Asian or emerging markets should come next. The last in line are thematic and sector based international funds. These are the riskiest and are cyclical in nature. Before zeroing in on the fund…Check the pedigree of the scheme and the fund house. Analyse the consistency in delivering returns. Typically, avoid new fund offers unless they offer a geography or theme that is new. International funds also act as a long-term hedge against rupee depreciation. However, overseas funds are not for first-time equity or mutual fund investors. Only after having accumulated experience in market-linked investing, look for diversification through these schemes. Whatever the reason for picking an international equity fund, it is not a ‘one size fits all product.’

 

 

The bottomline…

Never make the mistake of including International Funds as a part of the core mutual fund portfolio. Make sure there is a good portfolio in India, which can help absorb the shock of any sudden changes in foreign markets, before investing overseas. Investments should be spread across different asset classes like PF, PPF, FD, real estate, gold, mutual funds, stocks, etc. Without a good asset allocation in India, foreign investments should not be considered. 10-20% of portfolios in international equities serves as a hedge against the vagaries of the domestic market.