Reasonable exposure will help bring down portfolio risks
WITH the Indian market recovering very fast from the recent bear phase, domestic diversified funds could beat most of the schemes that are investing in international equities. Does this mean that Indian investors should dump the international equity schemes and concentrate only on the diversified equity funds focused on Indian equities?
The answer is a firm no, because you can't take an investment decision on the basis of historical returns alone. Further, it is obvious that a developing market like India will outperform global markets in a bull market like this. One should invest in overseas equity mutual funds for various reasons and the return is just one of the motives. And these qualitative reasons hold true even when the domestic equities are doing well.
Why Invest Overseas?
Diversification is the key reason why one should look at investing in overseas assets. Just like you do not invest all your money in one stock that you like, you should not put all your money in one market just because they offer you high returns. Reasonable exposure to overseas assets can help you to bring down your portfolio risks. The purpose of diversification is best served when the Indian equity investor invests in a market that has least co-relation with Indian markets. The international market also offers several opportunities that you cannot find in the domestic market. For example, you have to venture out into the international market if you want to take investment exposure in search engine, diamond mining, funeral services, etc. Sunrise businesses such as genetics, robotics that offer high growth potential can also be tapped in international markets.
When To Invest Overseas?
Though there is no 'qualification hurdle' for investing overseas, please note that this is a matured investor's business. If you have a core portfolio in place with 2-3 diversified equity MFs with large commitment to domestic markets and really need diversification, you can consider foreign securities. The MFs investing overseas should be a part of the satellite portfolio and exposure to such schemes should not exceed 5-10% of the entire portfolio. Growth in developed world, emerging markets growth and commodities are the three themes the investors can look at with a 2-3 year view for healthy risk-adjusted returns.
Fund Options Available
There are several funds that help investors tap opportunities across the globe and across asset classes. The first category includes feeder funds. Here the fund available in India invests in a fund that is registered overseas and does investments in international equities. Most fund houses have adopted this model. The drawback of this model is the higher costs due to double-layer arrangements. Lack of ample disclosures from the fund registered overseas is another problem for this model. In the second model, the fund manager directly invests the money into securities across the globe. Since it is managed in India, the portfolio disclosure is more frequent — i.e., once a month. That means that investors get to know where their hard-earned money is invested. Further, the expenses also remain capped. Expert advisors, however, question the fund managers' ability to take the right call on international equities, unless the fund house is part of an established global player. Birla Sunlife International Equity Fund and Mirae Global Commodities Fund are examples of this.
The third model is the plain vanilla index fund. Hang Seng BeES is a recent entry on Indian bourses and yet to make any significant impact on the way Indian investors invest overseas. Hang Seng BeES is a cost-efficient way of investing in Chinese equities with no fund manager risk. Some experts, however, question its diversification utility because there is a strong co-relation between Indian and Chinese equities. The last model offers a tax-efficient way of taking the overseas route. Here the fund invests at least 65% of the assets into Indian equities and the rest is allocated into foreign equities. The approach offers zero tax on long-term capital gains and also offers the much-needed exposure to foreign securities.
WHAT SHOULD ONE DO?
All four models come with their own advantages and disadvantages and investors have to decide what suits them best. For example, investors who are bullish on gold and gold mining business can go for options such as DSP Blackrock World Gold Fund and AIG World Gold Fund. For investors with an appetite for higher risk and looking for some exposure to 'commodity producing' economies, there is an option of ING Latin America fund. Investors can also opt to invest in funds that invest in themes.
But a word of caution, investing in sector specific, thematic or geographical schemes needs additional level of expertise. Investors should choose a thematic fund or geography-specific fund only if they have a view of that investment theme or are familiar with geo-political and economic set-up of a particular geography. Else, it is better to stick to a fund with a 'global diversified' mandate. And there are several sector-specific funds, thematic funds, country or geography-specific funds to select their picks. For example, investors who are bullish on gold and gold mining business can go for options such as DSP Blackrock World Gold Fund and AIG World Gold Fund. For investors with an appetite for higher risk and is looking for some exposure to 'commodity producing' economies, there is an option of ING Latin America fund. Investors can also opt to invest in funds that invest in themes such as global resources, global energy, agri-businesses and infrastructure.
