Twin boost: Rising US stocks, falling rupee prop up US-based feeder funds

Written by Ashley Coutinho | Ashley Coutinho | Mumbai | Updated: Jul 27 2013, 16:54pm hrs
The outperformance of US equities in the last one year and the rupee depreciation in the past two months has helped the cause of US-based feeder funds which channel money into larger funds run by their international partners.

In the past one year, these funds have given returns of anywhere between 25% and 34%, according to data collated from Value Research. The outperformance of the US markets in the last one year has boosted the returns of these funds, said Dhruva Chatterji, senior investment consultant, Morningstar India. The rupee depreciation has also helped their cause to some extent.

In the past year, most of the US indices have gained about 25%, with the benchmark S&P 500 index up 26%. In contrast, our benchmark BSE Sensex rose 18.6% during this period. The US dollar has strengthened against most emerging market currencies in the past few months, including the rupee, which has depreciated 6.55% against the greenback since May 22.

FT India Feeder Franklin US Opportunities has emerged the top US fund for a one-year and six-month period, with returns of 34% and 25%, respectively. ICICI Prudential US Bluechip Equity was the top performer for the three-month period, with returns of 17.8%.

We have seen positive newsflow on the US economy, and the US markets have outperformed emerging markets, including India, in 2013. The recent concerns over the direction of global liquidity has added to the divergent performance, which has helped the performance of feeders into US products, said Jaya Prakash K, director, global research & analytics, Franklin Templeton Investments.

The robust returns seem to have caught the attention of other fund houses which are lining up to launch these funds. Last week, JPMorgan Asset Management India launched JPMorgan US Value Equity Off-shore Fund, an open-ended fund-of-funds scheme, which will invest in JPMorgan Fund - US Value Fund, an equity fund which invests primarily in a value-style biased portfolio of US companies. Reliance MF has also filed an offer document with Sebi to launch a US-based feeder fund Reliance US Equity Opportunities Fund.

These funds are typically sought after by high networth individuals seeking geographical diversification. The US-based feeder funds from India invest into their parent company's fund, which is domiciled in the US. Investors can invest in rupees, which is then converted into dollars. The dollars are re-converted into rupees during redemption.

However, experts believe that diversification, and not currency play, should be the main reason for investing in these funds. I wouldn't advise investors to invest in these funds at this point in time as a lot of rupee depreciation has already been factored in, said Chatterji. He also advises investors to consider the taxation aspect before investing as these funds are considered debt-oriented and not equity funds.

For debt funds, short-term capital gains are taxed as per an individual's applicable slab rates, while the tax for long-term capital gains is 10% without indexation or 20% with indexation, whichever is lower.