Funds allow you to invest in global equity assets without having to set up any offshore account.
“Amazon jumps after smashing earnings”
“Facebook earnings beat despite backlash”
“Veteran investor says Tech fundamentals as good as ever”
These headlines of the past few days would have grabbed not just mine but perhaps your attention as well. They add fuel to the biggest global equity debate of the moment: Does the FAANG (Facebook, Apple, Amazon, Netflix, Google) story have more juice left?
Market talk & trading swings aside, this got me thinking about our options, as Indian investors, when it comes to investing in global equities.
According to Morningstar India, there are 190 different type of global mutual fund schemes available in India.These funds allow you to invest in global equity assets without having to set up any offshore account or even converting Indian currency.
The method of investment is as simple as putting money in your humble monthly SIP (please tell me you have that going!)
As a product, these MF schemes may opt for as straight forward an investment as US bluechip equities, to as exotic a theme as global agriculture or Brazilian commodities.
The investment is made in the equity of companies operating within the fund’s mandate.
So a ‘world metal & mining fund’ will invest in stocks of companies engaged in global mining, not the underlying commodity itself.
Great. So we have plenty of options. But the key question- should you park your money in these funds? Let’s answers this via 4 points that you must consider before making a choice.
RETURN ANALYSIS: PATCHY RECORD
The simple fact that some quick analysis throws up is that most global funds available in India have not exhibited very consistent return performance.
These MF schemes have done well only in certain periods or market cycles.
Let’s take the example of the last 1 year’s top performing fund – the Edelweiss Greater China Equity Offshore Fund.
This is essentially a feeder fund i.e the money collected by the fund in India is invested into the mother fund, which in this fund’s case is the JP Morgan Greater China fund.
The Edelweiss Greater China Fund has delivered a handsome 1 year return of nearly 32% - impressive by all counts. However check its 3 year record and the return is a paltry 6.4%, with the 5 year return being about 14%.
Move to the next big star of the last one year- the DSP BlackRock World Mining Fund – superb 1 year return of 28%, but 3 year return is just under 6% and the 5 year return is 0.5%.
The simple point – you need to be aware of the fact that global funds can be a high risk bet which means there may be periods of phenomenal returns but also long patches of underperformance.
These funds take a concentrated geographical and/or thematic bet and thus are not recommended for the first time equity investor. Short point- if you’re just about starting your first SIP with your first salary, these funds are not for you.
SIZE OF FUND
The next very important thing to keep in mind is the size of the fund you are investing in. Several global funds offered by Indian AMCs have a corpus as small as Rs 4-20 crore.
“You really don’t want to be in these funds” says investment expert Kalpesh Ashar. Kalpesh argues that if a fund having such a small AUM faces redemption by one big investor, it could spell trouble for small investors of the fund as well.
So make sure you go in for a fund having a reasonable size, ideally sticking to the largest funds available in this category.
Now let’s come to the next key point – taxation. Interestingly global equity funds are not taxed as per the equity criteria, but instead they are treated as debt funds.
The reason for this is that when these global funds invest in stocks of a foreign company, the fund house doesn’t need to pay STT or Securities Transaction Tax. Payment of STT is an essential condition for a security to be given equity tax treatment.
What this means is that returns from these funds are taxed in the same manner as debt funds i.e 20% Long Term Capital Gains Tax with the benefit of indexation.
“Tax can really take away a large chunk of the return, and unless these funds deliver a post tax return of at least 12%, I don’t see the merit in investing”, argues Ashar. Fair point, and one worth keeping in mind while you choose a global fund.
THE CURRENCY FACTOR
While global funds offer the benefit of being able to invest in global equities without having to convert money, the fact is that currency remains a risk.
According to personal finance expert Harshvardhan Roongta, dollar appreciation has comprised almost 4-5% of the 11-12% return given by US equity funds over the last few years.
While this is good news when the currency of the country in which you are investing is on a rising curve, it can be quite detrimental if the destination country’s currency is on a downswing.
One reason why most experts suggest sticking to US equity funds since the dollar is perceived as one of the most stable currencies from a forex risk point of view.
BOTTOMLINE: THE RISK REWARD
They way to approach global funds is by first taking a call on your own risk appetite. Look at these funds only after you have built a solid, high quality Indian equity mutual fund portfolio.
And even then, experts say global funds shouldn’t exceed more than 10% of your overall portfolio size.
Going by the Assets Under Management (AUM) and return consistency criteria, personal finance experts suggest sticking to US equity funds. Take for instance the ICICI Pru US Bluechip Equity Fund – a scheme that both Harshvardhan and Kalpesh like.
The fund has returned 16% in the last 1 year against its benchmark S&P 500 which has returned about 12% in the same period. The fund’s 3 year return stands at 9% and 5 year return at 15.2%. This is just one example.
The simple point here is unless you are a market wizard and can pick equity cycles & keep up with the latest global developments, its perhaps best to avoid niche geographical funds and stick to some of the largest most transparent global markets.
Whatever you do, make sure you look around at basics like the size of the fund, the underlying securities & consult your planner before going global. Happy investing!
First Published: IST