How to become a global investor

Global funds have truly arrived as mutual fund houses offered as many as half a dozen schemes in the last few months. There are a few more in the pipeline. These funds invest either wholly or partly in global equities.

A few years ago, the Indian stock market was the only playing field for investors and scouring beyond the geographical boundaries for investment opportunities seemed like a distant dream. But when the Reserve Bank of India relaxed the overseas investment norms some time ago— even upped the individual overseas investing limit last week to $200,000 (Rs 80 lakh)—it marked the arrival of the global Indian investor.

Global funds have truly arrived as mutual fund houses offered as many as half a dozen schemes in the last few months. There are a few more in the pipeline. These funds invest either wholly or partly in global equities.

When the window for overseas investments first opened, there was only one fund: the Principal Global Opportunities Fund. Since then the restrictive conditions that marred the growth of overseas funds have been further relaxed. Just last week, RBI relaxed the investment limit for the overall fund industry from $4 billion (Rs 16,000 crore) to $5 billion (Rs 20,000 crore).

Last week, SEBI too increased the limit from $200 million (Rs 800 crore) to $300 million (Rs 1,200 crore) for each fund house to invest overseas. Fund houses have grabbed the opportunity, launching schemes with different global themes—from a wide angle view on emerging markets to a sharply focussed Chindia investment theme to global gold mining companies—they are offering it all.

The global rush

The global funds have been wellaccepted for another reason: diversification across countries. ABN AMRO’s China India Fund is banking on two of the largest and most promising countries.

On the other hand, Kotak Mutual Fund’s Global Emerging Markets Fund will invest across markets where its investment manager, T. Rowe Price, has invested. In Birla Sun Life’s International Equity Fund, around 65 per cent of its corpus will be invested in India, the rest overseas.

“The value of these funds will become clear over a period of time,” says Anup Maheshwari, Executive VP and Head (Equities), DSP Merrill Lynch Fund. The fund house recently raised $120 million (Rs 480 crore) for its World Gold Fund, which invests in international gold mining companies.

Maheshwari outlines the logic for the fund, “It is an asset class which was not available to Indian investors. It is not strongly correlated to the rest of the portfolio of the investor.”

N. Prasad, Chief Investment Officer, Sundaram BNP Paribas Mutual Fund, agrees that the key advantage of global funds is asset diversification. Prasad’s fund house mopped up around Rs 320 crore earlier this year for a fundof-funds scheme that invests in international mutual funds with a focus on emerging markets, real estate and commodities. Some of these overseas funds may well be reinvesting in India.

The global risk balance

  • Essential facts you should know before going global.

  • Case for asset diversification; global events may influence Indian markets, but the reverse may not always be true

  • Buying opportunities in truly global companies and sectors not available in India

  • Leverage growth potential; India accounts for less than 1 per cent of world market cap

  • Funds which are predominantly Indian funds (65% and more) are quite tax efficient


Short-term movements in currency could upset gains made on the investments

  •  The investment climate of overseas markets and countries could change substantially
  •  The investors may have to bear the expenses of the underlying schemes as well
  •  The underlying schemes could wind up leading to short periods of no returns 

Fund houses have launched feeder funds for overseas funds or are investing directly in equities on the advise of investment managers. Birla Sun Life is banking on Standard & Poor’s advise.

The asset allocation is distinctly bottom-up which, essentially, is directly investing in growing overseas stocks.

For instance, Kotak Global Emerging Market Fund’s investment pool comprises 100-175 stocks spread over more than 15 countries. There is no investment restriction in a particular country. As S. Naren, Senior VP and Fund Manager, ICICI Prudential Mutual Fund, points out, the overall intention is to mirror the benchmark weights, which for the Indo Asian Equity Fund is the MSCI Index.

Different Risks

One key risk associated with overseas funds is currency fluctuation as they don’t have an option to hedging against adverse currency movements.

“The inherent currency risk in such funds is over and above risks associated with similar funds in India,” says Krishnan Sitaraman, Head (Fund Services and Fixed Income), CRISIL.

As the Indian rupee has appreciated over 10 per cent against the dollar since the beginning of 2007, the dollar assets may well be hit by this movement.

But overseas, funds are not invested directly in dollar assets alone. “The dollar is only a translating currency. We will be invested in Chinese Yuan, Korean Won and others,” says Naren.

Taxing issues

There’s a tax advantage for funds that are invested 65 per cent in India.

These funds get treated as equity funds which attract zero long-term capital gains tax. The same in case of funds which are invested overseas by more than 35 per cent is either 10 per cent without indexation.

No surprise then that fund houses are structuring Indian investments into such funds to make them more tax efficient. But there’s a dual fund management structure.

So the short advice to investors would be to go global by investing in these overseas funds, but not before you have invested in India.

While there is a case for diversification, Maheshwari cautions that “these overseas funds are certainly not the right products for an Indian investor who is under-invested in India”.

Prasad’s succinct advice is investors should not invest more than 3-4 per cent of their total pool in overseas funds.

But some diversification can do much good as the world is now your playing field at your doorstep.