International funds ask overseas funds have not been able to excite the Indian investors. With an AUM of Rs.2968.3 crore across the 22 schemes, this category accounts for a mere 2.26% of the total equity AUM. Why?
The background
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With a view to facilitating investment overseas, the aggregate ceiling for overseas investment by mutual funds was enhanced from USD 4 billion to USD 5 billion from April, 2008. Within the overall limit of USD 5 billion, mutual funds can make overseas investments subject to a maximum of USD 300 million per mutual fund.
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Going by the investment destinations, there are broadly two categories on offer:
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The first category is the truly global funds which are not restricted to any region such as Birla Sun Life International Equity Fund, DWS Global Thematic Offshore fund and Principal Global Opportunities. These funds invest across markets, stocks and sectors.
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The second category is the funds that invest in regions closer to our borders, such as the ICICI Prudential Indo-Asia Fund or Franklin Asian Equity Fund. Fidelity International Opportunities has a “go-anywhere” mandate, but focuses on the Asia Pacific region excluding Japan. The Mirae Asset’s China Advantage fund takes a more regional approach by focusing on the fastest growing Asian country.
Popularity not as expected
Indian investors have not accepted overseas funds because they believe that India offers more rewarding opportunities as it continues to outpace almost all countries in growth rates. Also, the 2008-09 events impacted most parts of the world more severely than India, further reinforcing this belief. This seems to be vindicated by the relatively lackluster performance of these funds as they have struggled to match the performance of the domestic equity funds. The category average of one year return of these funds is 13.21% compared to 29.46% of domestic equity funds as of November 13th, 2010.
According to industry observers, the Indian investor has not realized the importance of geographical diversification. Also, the task of selling the track record of ‘distantly located’ fund managers to distributors and investors is more challenging.
Further, international share and mutual fund transactions are taxed at a higher rate compared to domestic ones. Finally, investors realize that there is an additional risk of foreign exchange rates when they invest in these funds. Evaluating the investment management record of the fund manager is one thing, evaluating their expertise in currency management is a different ball game altogether!
