One of the fundamental principles of equity investing is diversification. Investing in an index fund for e.g. will help us diversify the portfolio away from specific stocks or sectors. With the Indian markets going through tough times does it make sense for us to invest outside? Today the investor is lucky to have opportunities to invest directly or through mutual funds. This post looks at Indian funds with direct exposure in International stocks.
Regulations:
The Indian government has allowed mutual funds to have international exposure of upto five billion dollars. In the second half of 2007 eleven overseas funds raised 2.2. billion dollars. Of course only a part of it will be invested outside. If the fund invests more than 35% of the assets abroad then it will not be considered to be an equity fund.
Advantages:
The advantage these funds offer is the chance to invest in foreign companies. They could have an emerging market focus or could be in large companies in the developed economies. In scenarios when the Indian market suffers a steep fall, there will be a cushion. Also investing in specific themes is possible. For e.g. DSPML World Gold fund invests in gold mining and producing companies. The mechanism is being followed is to invest in Merrill Lynch International Investment Funds - World Gold Fund (MLIIF -WGF). According to September portfolio of the fund, the top three companies where the fund invested are Australia-based Newcrest Mining, Canada-based Barrick Gold and China's Zinjin Mining.
Disadvantages:
The downside is lack of understanding of the markets and the mechanism for investing. The transparency levels are lower. While some funds invest directly in foreign companies, other invest in indices. This is popular with International fund houses. For e.g. Principal invests in PGIF Emerging Markets Equity Fund as a vehicle. This could also lead to conflict of interest issues. The investor also takes on currency risk as he is exposed to exchange fluctuations.
Performance:
Most of the funds have a short track record of less than one year. The oldest funds in the Indian market in this category are Templeton India Equity Income and Principal Global Opportunities Fund. A quick review of the returns reveals that they have outperformed their category in the past three months. However over a one year period, the Indian indices outperform the Principal fund. What this reveals is these funds offer greater protection during downside in the Indian markets.
A look at the portfolio of the Templeton fund reveals that it has invested in stocks like Anglo American PLC (USA), Ternium SA (South Africa), United Micro Electronics Corporation (Taiwan), Samsung Heavy Industry (Korea) etc. The fund has outperformed the Indian Indices since it’s inception. The DSP Gold Fund has delivered returns comparable to Gold ETF’s in the market.
Conclusion:
International funds have a definite part to play in our portfolios. While they need not be core holdings, it is worthwhile investing in them through the SIP route. We like the Templeton India Equity fund. A good track record, greater transparency and an emerging market focus are favorable pointers. The fund manager, Mark Mobius has proven expertise in investing in emerging markets. The fund has a decent corpus of Rs 1500 crores, available for investment. It would be a good long-term addition to a portfolio.
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