The world in your portfolio

If you are looking for growth beyond the Indian shores, consider international funds. They have made a small beginning in India through feeder funds, which invest their corpus in different overseas mutual funds, some even invest directly overseas. For Indian investors, they offer the muchneeded overseas flavour.

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There’s a case for looking overseas. Consider the recent crash that caught everybody unawares. One key reason, according to Nilesh Shah, Deputy Managing Director, ICICI Prudential AMC, was the sudden exit of foreign investors to China. The Chinese market was overweight, but valuations there slipped till it came to levels similar to the Indian markets. Sensing an entry point, the FIIs rushed to capitalise by rapidly pulling out of India.

Money flows to different countries or assets depending on their attraction and prices. All assets may not move in a similar fashion. So, diversifying to a limited extent can help mitigate the risks of exposure.

Separate ways

How much should you diversify? Fund managers have unanimously capped this at 10-15 per cent of the total portfolio as the India story is unfolding nicely.

The global funds primer The menu of international funds open to resident Indians is expanding.

Specific purpose or theme funds: This type of fund invests in a particular sector, commodity or an emerging theme overseas. An example of this fund is the DSP Merrill Lynch World Gold Fund, which invests exclusively in gold mining and gold-related companies worldwide Overseas domestic hybrid funds: As the name suggests, this fund invests in a mix of domestic and overseas market. The tax laws allow funds with at least 65 per cent equity exposure a tax break and the balance 35 per cent can be invested in other instruments. Fund houses, therefore, have launched hybrid funds, which invest the balance 35 per cent in overseas assets Pure overseas funds: Here, the entire corpus is invested in overseas assets, which could be either commodities or equities in one or many countries. The tax treatment of this fund, however, is similar to that of a debt fund as they don’t meet the criteria of having a minimum exposure of 65 per cent in domestic equities Emerging market funds: This is a flavour of the season in the country at the moment. These funds invest in emerging markets across the globe. The allocations to different countries are done in accordance with a fund’s benchmark index. For instance, if the India weight of a particular index is, say, 9 per cent, the emerging market fund will invest 9 per cent of its corpus in India Developed market funds: Like emerging markets, these funds invest in a basket of developed markets. Here again, the allocations are done as per the benchmark the fund follows Pure country funds: This fund invests in a particular country and is popular abroad with investors looking for investing in one country. This type of fund, however, has yet to make its debut in the domestic market

And how and where should you invest? There are a couple of things you must watch out for. First, how similar the overseas assets move to, say, the Indian stock market. “Look out for the countrywise correlation,” says Sanjay Prakash, CEO, HSBC Mutual Fund. A low correlation, which essentially measures the statistical relationship between two markets, between economies is ideal.

For instance, the statistical comparison of the Indian and Russian markets stands at 0.27. “If the Indian index moves up by 10 per cent, then the Russian index will be up too, but the increase would be about 2.7 per cent,” he says.

On the other hand, funds should have clear operational expertise and domain knowledge of the countries they are investing in.

Also look for the fund’s investment objective and see that it matches yours. Fund managers should clearly explain the rationale to invest in different countries.

One must also look at the kind of sectors and opportunities the countries or a basket of countries offer. Not all countries have the kind of sectoral diversification India has. Says Yogesh Kalwani, Senior Vice-President, Motilal Oswal: “Look at whether funds are heavily oriented to a specific sector in a country for want of better stocks. If the particular industry suffers a setback, there could be value erosion.”

A stock like Samsung, for instance, can be purchased only on the Seoul Stock Exchange.

Likewise, domestically, there aren’t opportunities in refining or mining platinum or gold as these metals are not available here. “Such commodity funds can be a great idea,” says Sridhar Parthasarathy, Assistant Vice President and Head (PMS & Research), DBS Cholamandalam Securities. Precious metals nowadays provide a good hedge against equity risk. Says Shah: “Brazilian and Russian markets are better known for their commodities.”

Unlike domestic mutual funds, there are many new international funds that are yet to be launched in India.

However, the tax treatment of investments in international funds with an exposure of over 35 per cent in overseas equities is similar to a debt fund.

But like any investment, keep tabs on the environment for overseas assets—the weather constantly changes.