Overseas Funds

OVERSEAS FUNDS

Beyond boundaries

Sandeep Singh

Posted online: Tuesday , April 24, 2007 at 1216 IST
Updated: Wednesday, June 29, 2005 at 1257 hours IST -->

Overseas Funds: In the past year, the BSE Sensex has appreciated a solid 18 per cent. Over the same period, China’s Shanghai Composite has shot by a blistering 162 per cent, but Japan’s Nikkei 225 has crawled 3.1 per cent. Not all markets move in tandem. At one point in time, one market could be surging, another could be struggling. Travel ahead, and the positions could get reversed.

So far, for you, tracking performance of other markets was an academic exercise. Now, with the emergence of overseas funds — Indian mutual funds that invest wholly or partly in foreign securities — as a feasible investment option, these numbers could shape your portfolio returns. But should you invest? And if so, how much and how?
What’s changedThere are presently two overseas funds, namely Principal Global Opportunities Fund and Templeton India Equity Income Fund. Next in line is Fidelity International Opportunities Fund, whose new fund offer is currently on and which will invest up to 35 per cent of its corpus in foreign stocks. Kotak Mutual Fund and Sundaram BNP Paribas have filed offer documents.
Overseas funds debuted in March 2004, but they failed to enthuse even fund houses, leave aside investors, because of investment restrictions. The government said mutual funds could invest only in those listed foreign companies that held at least 10 per cent in a listed Indian company.
Just 40-45 foreign companies qualified, that too mostly from old economy industries and from select geographies. Says Rajan Krishnan, business head - asset management, Principal PNB AMC: “This restricted us to only the US, Western Europe and Japan, where the returns were stable, but low, compared to emerging markets. We also didn’t get access to sectors.” Also, investment in foreign stocks was capped at $50 million for each fund house and $1 billion for the industry.
As India continued to move towards full convertibility, these restrictions were relaxed. The big change happened in mid-2006, as Indian funds were allowed to invest in any stock listed on a recognised stock exchange. That meant fund houses could look beyond developed markets, at emerging markets.
The caps were also relaxed, from $50 million to $100 million in February 2006 to $150 million in February 2007; the overall industry limit was doubled to $2 billion. Individuals were also allowed to invest up to $50,000 a year directly overseas. While rules and modalities for direct overseas investing are still being worked out, Indian mutual funds are launching schemes that provide a similar exposure, but are not covered under the $50,000 limit as the investment is made in Rupees in India.
What’s on offerThe common theme among the existing schemes is that they are all targeting emerging markets, which have bettered developed markets by a margin (See table: The emerging markets story). Says Ashu Suyash, managing director, Fidelity Fund Management: “Several emerging markets have performed better than ours. They also provide opportunity to diversify geographically, as there is low correlation between markets.”
Following the rule change, Principal Global Opportunities remade its portfolio, from one perforce oriented towards developed markets to one oriented towards emerging markets — its entire corpus is now invested in Principal Global Investors Emerging Markets Equity, an eight-year-old emerging market fund managed by the parent.
There are differences in the way the overseas fund offerings are structured, which have ramifications for you. The first difference is where they will invest. Principal is completely into emerging markets. Fidelity, by comparison, will invest only up to 35 per cent of its corpus in foreign stocks, with “high focus on opportunities in Asia Pacific”; the balance 65 per cent will be in Indian stocks.
According to Fidelity, the main reason for the 35 per cent cap is tax efficiency. To qualify for the tax benefits available to equity funds — total exemption on long-term capital gains and dividend distribution tax — a scheme must invest at least 65 per cent of its corpus in Indian stocks. Otherwise, it gets classified as a debt fund, and is taxed accordingly. On that count, Fidelity International Opportunities Fund will be taxed as an equity fund, Principal Global Opportunities Fund as a debt fund. Also, says Suyash: “The $150 million cap limits our plans. As the cap increases, we will consider full investment in foreign securities also.”
What to doA new investment avenue is heady, more so if it gives a chance to profit when the home market is tame. A Fidelity study for 2002-2007 shows that while developed markets largely move in sync, emerging markets, including India, had a mind of their own. Diversifying across countries gives you a chance to be present in markets that are growing. That increases returns potential, but it also increases risk.
Experts advise a small-scale migration, aimed more at portfolio diversification rather than at returns maximisation. Says financial planner Surya Bhatia: “At best, 10 per cent of your portfolio.” The economy and, by extension its companies and market, are tipped be remain among the fastest growers. Says financial planner Veer Sardesai: “Why go out? India is doing well, so well that everyone is coming here to invest.” Investing in assets of other currencies also means taking on exchange rate risk.
Another factor that will influence your choice of scheme is outlay. Say, you have a portfolio of Rs 10 lakh and you decide to invest 20 per cent abroad. In a dedicated scheme like Principal’s, you can put Rs 2 lakh. But the same amount in the Fidelity overseas fund, which caps its foreign holding at 35 per cent, will get you a foreign exposure of only Rs 70,000. For a 20 per cent exposure, you will need to invest Rs 6 lakh.
The emerging market funds of both fund houses have bettered their benchmark. Over a three-year period, the Principal fund delivered a CAGR of 30.8 per cent, Fidelity 30.7 per cent, while the benchmark gave 28.3 per cent. The number and scope of overseas offerings will increase. Says T.P. Raman, managing director, Sundaram BNP Paribas Mutual Fund: “We will put 60 per cent in emerging market funds, 20 per cent apiece in commodity and real estate ETFs.” The choices will be many, but let logic, not glamour, guide you.

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