BT Buzz: SEBI enhances limit for international funds - Should you invest?

BT Buzz: SEBI enhances limit for international funds - Should you invest?

After 9 months from the beginning of equity market meltdown, international mutual funds have outperformed most of the domestic diversified funds by a big margin

The limit for entire mutual fund industry has been kept at $7 billion by the regulator The limit for entire mutual fund industry has been kept at $7 billion by the regulator

The recent global turmoil in equity market due to pandemic has brought to the fore the importance of international equity investment. After 9 months from the beginning of equity market meltdown, international mutual funds have outperformed most of the domestic diversified funds by a big margin.

"In the last 10 years, MSCI All Country World Index has delivered 14.3% CAGR returns in INR terms vs 8.3% for Nifty. The difference is more stark in the last one year, when Nifty is negative, while MSCI All Country World Index is up in double digits," says Alok Aggarwal, Senior Fund Manager, PGIM India MF managing the PGIM India Global Equity Opportunities Fund.

Advancement in technology and increased level of digitisation in capital market has allowed many companies to offer seamless digital investment experience even in global equities. While a good number of investors have gone for direct equity exposure, there are many who have preferred international equity exposure through mutual fund route.

"To cater to this growing demand of the new-age investors, many mutual fund houses have also started focusing on international stock investments offering people exposure to these markets without having to worry about compliances or studying a new economy and culture," says Harsh Jain, Co-founder and COO, Groww.

India's equity market has grown significantly, but when it comes to global equity it still has a very minor share. An international MF gives you the true global diversification. "India's market cap is less than 2.5% of World Market Cap. Bulk of the equity asset class is outside India. It gives exposure to multiple themes, which are not truly present in India," says Aggarwal of PGIM India MF.

Enhanced limits by SEBI

Sensing the potential of overseas equity investment, the SEBI has increased investment limits per fund house for international investment to $600 million. Earlier the limit was $300 million per fund house. The limit for entire mutual fund industry has been kept at $7 billion by the regulator.  

This enhancement has come after a big gap of 12 years as it was increased from $5 billion to $7 billion in 2008. "This decision will help mutual fund houses offer a wider range of products and/or boost their existing schemes. Hence, Indian investors will have more options to add geographical diversification to their investment portfolios," says Jain of Groww.

Now a mutual fund house is allowed to invest in foreign exchange traded funds (ETFs) of $200 million as against $50 million in the past. The overall industry limit for the ETF investment is kept at $1 billion. "It's calibrated monitoring of limits. It will allow Indian investors to diversify their portfolios through the mutual fund route in a low cost, efficient manner" says Aggarwal, PGIM India MF.

While overall utilisation of earlier limit for overseas investments by MF houses was low, few AMCs reached very close to the previous limits. "In the fund of funds (FoF) category, overseas assets under management (AUM) touched Rs 6,496 crore at the end of September 2020, according to data from the Association of Mutual Funds in India (Amfi). This figure does not include funds that primarily buy local stocks, but also invest part of their corpus abroad," says Aggarwal of PGIM India MF.

While most of the mutual fund schemes having global equity exposure are very small in terms of asset under management, this decision by the regulator is aimed at future. "Even though the overall industry cap remains unchanged, the current utilisation is at 15%. This will give mutual funds the confidence to promote international equities as a theme," says Prateek Mehta, Co-Founder, Scripbox.

The Forex Factor

One of the very critical factors which decide the overall return in overseas equities is the exchange rate. While you could get one USD for INR 64.54 on 24 November 2017, now you will have to spend INR 74.16 (as on 20 November 2020) to get the same. If you invested in US stock 3 years ago you could have made a gain of around 15% just on account of exchange rate movement.

 "The Rupee depreciation angle adds further value. Investment is all about diversification and asset allocation - International investing offers both. All these factors have ensured that investor interest in International investing is rising," says Aggarwal of PGIM India MF.

India being an emerging country which is marching on higher growth path for considerable future, higher inflation and currency depreciation is expected to continue as well. Barring some small period of rebound, investment in advanced countries will continue to offer currency depreciation advantage.

One country or multi country exposure?

If your primary objective is to have global diversification to minimise country-specific risk then you should go for a fund with exposure in multiple countries. "In the long term, investors would be better off investing in funds that are free to invest in any country, region or sector. Investing in a country fund/sector fund has higher risk than a truly diversified global fund," says Aggarwal of PGIM India MF.

However, if you have a definite view on growth potential in a specific country or if you have some country-specific future expense like children education then you can also go for country-specific dedicated fund.

"For investors who have some future needs planned in forex, this is definitely recommended to add to the overall portfolio. These funds also represent a good currency hedge as the value of rupee depreciates against the dollar," says Mehta of Scripbox.

However, when you go for country specific fund you need to be cautious. "If investors are opting for a country-specific scheme, then they must ensure that they research the country and assess if investing there for the next few years is a feasible option," says Jain of Groww.

Even in a country specific fund, you can look for further diversification within that country. "If they are considering international investments with an objective of geographical diversification, then they need to look for schemes that are well-diversified across sectors and market capitalisations in the said country," says Jain of Groww.

Limited or Full exposure?

Some MFs give you partial exposure to global equities while their major investment is domestic stocks however, there are other funds which are dedicated to overseas investment only. If you have to take a call as which one to go for then you will have to look at asset allocation requirement.

"To decide whether you should go for completely dedicated international funds or funds that have partial exposure to international equities, you should look at targeting 10-15% of your overall portfolio in international equities," says Mehta of Scripbox.

Once you have decided the asset allocation requirement then choice of funds will open up as you can achieve this allocation with both kind of funds.

"The desired level of asset allocation can be achieved either ways. E.g If the advisor has prescribed 10% international investing in the asset allocation of the investor, the objective can be achieved by multiple combinations like investing 10% of assets in schemes dedicated to international stocks only or investing 8% of assets in schemes dedicated to international stocks only and 10% of assets in schemes investing 20% of assets in international stocks," says Aggarwal of PGIM India MF.

Precautions to take

Though international investment has brought good return recently, you need to be mindful of possible risks as well. "One of the most common mistakes in international investing is that often investors forget diversification is the key objective. Once they decide on international investing, a lot of times, the decision making gets biased in favour of markets/sectors that have done well recently," says Aggarwal of PGIM India MF.

Just as you need to take precautions in selecting a right domestic fund, you also need to be cautious while selecting a right international fund. "Investors must remember that apart from the fact that these schemes are investing in international countries, they are mutual fund schemes and have the same skeleton as a domestic scheme. Hence, checking it thoroughly can help avoid hasty decisions," says Jain of Groww.

Rather than starting your equity investment with a dedicated international fund you should have some domestic investment before going for international fund. "It is important to ensure that you have enough set aside by way of emergency corpus, and investment corpus linked to Indian markets so that in case there are fluctuations in the international market, your immediate financial goals are not compromised," says Mehta of Scripbox.

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