For the last few months you must have come across many mutual fund houses offering global equity funds. Besides the hoardings on your way to work, both electronic and print media must have made you aware of the great benefits that you enjoy if you happen to invest in global funds.
This is just a reiteration of the fact that the advantages in global equity investing are really noteworthy. At a juncture when Indian equity markets along with some of the emerging markets are quoting sky-high valuations, it makes a lot of sense to look beyond Indian equities.
The proposed international equity funds can not only offer you geographical diversification but also an exposure to equity assets held in different currencies. At a moment when the rupee is appreciating against the dollar, this may not sound like a great idea, but when things work the other way around, one would prefer assets in non-rupee strong currencies.
Given the benefits, one may think that the offering is something that you can’t afford to let go. However, there are some factors that you have to consider and be selective while choosing the scheme if at all you intend to invest into one.
The first issue that you must ponder over is the targeted assets. Some of the funds are purely fund of funds. Here, the scheme will invest into a larger fund or multiple funds that invest in global equities. In other words, there is little stock selection that the domestic AMC will do. This concept is not really encouraging, taking into account multiple layers of asset management amounting to an increase in costs.
Here, one must admit that this has led to reduction in risks as very few Indian AMCs have experience in managing global assets. Investing in global markets needs a strong research backbone and a track record to attract investors’ money. In such circumstances, this has become an inevitable option for many Indian mutual funds, though the investors are paying for it.
Consider another factor. Most of the times we Indians are told that our investments are more dependent on the tax aspect. We are accused of investing to save income tax and nothing else. Most investment gurus and financial planning experts keep telling us that saving tax and tax-efficiency should be the last thing to look at.
If this is the case, why are most of the schemes that talk of investing globally investing at least 65% in Indian equities? This is primarily because a fund enjoys a better tax status if it is an equity fund investing at least 65% in Indian listed equities. Investments in such funds are exempt from capital gains if the units are held for more than one year.
To make the investments tax efficient, the real objective of geographical diversification is kept on the back burner. If you are keen to invest into an international equity fund, why should the fund have at least 65% of its investments in Indian equities?
Also, taking into account the fact that the market capitalisation of Indian equity markets comprises nearly 2% of the market capitalisation of global equity markets, a 65% allocation to Indian equities in a global equity fund does not make any sense.
Many schemes that are on offer are also talking specific sector exposure or Asia-specific investing. The Asian economies, no doubt, will be the forerunners when it comes to global growth. However, a plain vanilla global equity fund would have made more sense, where the fund manager is entrusted to take the call to allocate money to continents, stocks and currencies.
One may have a look at the Birla Mutual fund offering, where the fund house has come out with two plans in its international equity fund. One plan is an India-intensive tax efficient fund and the other one does not have any India-specific commitment. The first option is suitable for you if you are keen to invest into a tax efficient fund with some icing of global equities. The other option ideally should work better if you intend to invest into a truly global fund.
Currently, all these funds are at the new fund offer stage barring Templeton India Equity Income Fund (TIEIF) and Principal Global Opportunities Fund (PGOF).
TIEIF has a one-year track record and has delivered returns of 49%, whereas PGOF has been around for three years and has delivered returns of 20.58% annualised over three years and 37% over the last one year. Point to note that TIEIF invests 65% in Indian equities and PGOF invests in PGIF, an emerging markets dedicated fund offered by Principal global. The point to note is that PGIF has US dollar as its base currency.
Investors willing to take the foreign equity plunge should be aware of all these factors.
