You may understand it as opportunities, which are perceived to be promising and one of the few penultimate ones or another attempt at gaining gains. More than 15 mutual funds have a focus on overseas markets, foresee an imminent launch and more than 10 have already been launched. As an investor, you could read two important signals into this. First, fund houses, having conducted adequate research on their part, are exploring investment options overseas, as opportunities back home appear slim. Second, is it the right time you should subscribe to these about-to-be-launched and launched funds?
In both cases, what comes across as a crucial question is the focus, reach and the lucrative element in these funds and as these funds take exposure to different countries, how lucrative are those countries as investment options, difference between already-launched funds and the to-be-launched ones, the performance of already-launched funds and lastly, what points you need to bear in mind while investing in these funds. Here is an analysis of all these parameters, which would facilitate your decision-making process involved in the investment.
The adjustments
Of the 12 overseas-focussed funds launched, six were launched after December 2007. This indicates the timely adaptability shown by fund houses in terms of parking investors’ money (overseas) as the markets nosedive began to gain momentum in December 2007. It would be safe to assume that the think-tank of fund houses foresaw the decline and they brought in funds that would focus overseas. Hence, you need to take into account the situation in the domestic markets and ‘why and when is the fund focussed on a particular country.’
An analysis of returns generated by the launched-overseas-focussed funds in relation to the Sensex gives a perspective about the performance of the launched-overseas-focussed funds. If you plan to invest in overseas-focussed funds for diversification, an analysis into the performance suggests that these funds have performed more or less in line with the Sensex. However, a comparison within the funds gives a telling picture.
Birla Sun Life International Equity Fund Plan A (Growth) has delivered relatively better returns than other launched-funds. The reason being the fund has international focus (29 countries-exposure), which mitigates the risks associated with a single-country exposure. Hence, it makes sense to have an investment in an international focus fund. The ones, who are not risk-averse, can go for the concentrated approach, at low levels as when opportunity seems conspicuous. However, it is advisable that these investors must not park their funds in these funds with a longer-term horizon and exit from it as and when opportunities and aims are fulfilled. One must consider the risk factors of overseas markets investing before taking a decision, warns Devendra Nevgi CIO-Debt, Quantum Mutual Fund.
Also, you need to take into account funds, which claim to have a global focus and under the claim of picking up companies on the basis of competitiveness (such as export), these funds pick up Indian companies.
An important point you should note is that, when the term emerging markets is used, Indian markets also come into picture and these funds defeat the very purpose of investing in funds having an overseas exposure: Diversification.
Various facets
Another crucial point that you need to take into account is whether the fund you have chosen invests directly into the markets of the country concerned or through mutual funds (also called Fund of Funds) or any other instrument (or security) in that country. There are risks associated with indirect investment. Your fund would invest primarily in shares/units of a mutual fund, which in turn invests in companies incorporated or which have their registered office located in or derive the predominant part of their economic activity from the country concerned. Hence the fund’s performance may depend upon the performance of the underlying fund, which in turn depends on currency risk.
The assets in which the underlying fund is invested and the income from the assets will or may be quoted in currencies, which are different from the underlying fund’s base currency. The performance of the underlying fund will therefore be affected by movements in the exchange rate between the currencies in which the assets are held and the underlying funds’ base currency and hence there can be the prospect of additional loss or the prospect of additional gain to the investors greater-than-usual-risks of investment. The performance of the underlying fund may also be affected by changes in exchange control regulations. There would be lower transparency, as investors would not be aware of the portfolio and the sectors where the overseas fund exposure is.
Another point one should remember before going for fund of funds is it involves double cost, where investing in a another would entails cost and then in turn the funds are invested in the equity market. Due to all these reasons FOF is suited best for the medium risk taker. Funds that invest directly serve good for informed and keeping-tab-of-news-development investors. These funds take into consideration the company and the country aspect of direct investment overseas. There are companies globally, which have a single, niche and powerful business presence, while there are countries, which have added advantages over certain resources and hence command a good investment attraction. However, a combination of exact match of the business of the company and the niche of the country would be one of the few lucrative investment options that you can buy into. Hence, you need to choose such funds, where both these arguments work well.
About the about-to-arrives
At least nine more funds having an overseas focus are about to be launched. From these, some funds are focussed on new countries/continent like Latin America, North America, Emerging Europe, Africa, the Middle East, ASEAN (Association of South East Asian Nations) and Hong Kong. If the US problem cools off a little, among the countries, South Korea is the preferred destination where one can look at considering the valuation and fundamentals (forward P/E in single digit), suggests Devendra Nevgi.
These funds, instead of focussing on themes, have shown preference towards countries. And this approach may benefit these funds, considering that the countries chosen are new and it scores well on the principle of diversification. These countries are not the fast-growing ones but they can act as a pacifying element for investors considering that they are not as volatile to an extent the emerging markets are.
“Overseas investment is used to look for the opportunities one cannot get in the domestic market”, advises Krishna Kumar Fund manager of Sundaram BNP Paribas Mutual Fund. For instance, the fertiliser sector is completely under the government in the country and it is quite liberal overseas, so the fund house can increase its exposure there.
A chunk of these about-to-launch funds follow indirect investing (fund of funds). A large part of the already-launched-funds followed indirect investing (fund of funds) and as the commodity markets demonstrated a solid bull-run, a greater part of these funds focussed on the commodities, metals and the infrastructure themes.
One of the chief reasons both the launched and the about-to-launch ones follow indirect investing is that it saves costs of the initial setup for them, which direct investment entails. Also, the presence of the local fund manager, who adds a domestic perspective to investment decisions, add to the overall value enhancement of these funds. Before investing in a fund of funds, the indirect way of investing, you need to take into account the fact that the launched funds need to show their track record in its offer document. To be precise, you need to have a record of the information of deployment of money of the fund having an overseas focus.
However, if there is no track record made available to you, it may present a narrow view of the fund and it would amount to a riskier investment considering the money, currency and other returns-impacting parameters. The reason is you cannot track the portfolio and the sector where the fund would invest and also the new overseas fund would involve the additional cost involved in setting up of the fund and marketing expenses, all of which add to costs involved in overseas investing.
Hence, it makes sense to invest in funds, which have a proven track record, have delivered decent returns and is multi-focussed. The reason being a display of information increases transparency of the fund and it gives substantiated arguments, which in turn would give you adequate confidence irrespective of whether the fund is country-focussed or has international exposure.
Apart from track record factor, you also need to focus on the asset allocation factor before investing in a fund having overseas exposure. The returns and the correlation of the fund with the domestic-focus fund also depend on the asset allocation between overseas and domestic in regard to your portfolio construction. This would give you a clearer picture, whether the investment is a good diversification strategy or not. Also, the proportion factor plays an important role in choosing a fund having overseas focus.
There are funds, which present a picture of investing in overseas markets directly or indirectly but with a lower proportion. And it is observed that more than half (65%) the allocation of these funds is India-centric. One of the repercussions investors suffer is that these funds reflect more or less the domestic index, itself considering the higher proportion given to domestic markets and a fairly lower one given to overseas markets. You need to ensure that the fund, which claims to have an overseas focus, invests a larger portion of assets in the overseas markets and a bit in the domestic, if necessary and justifiable.
Otherwise, it defeats the very purpose of investing overseas.
