Choose your sector, choose your region, choose your country, or simply choose the whole world. All of a sudden, global markets have opened up for Indian investors even the smallest ones.
No, we are not talking about the Reserve Bank of India (RBI) now allowing every Indian to invest up to $0.2 million (Rs 80 lakh) a year in foreign markets. We are talking of something easier the influx of global mutual funds that invest your money in foreign markets.
Till a few months ago, there were only two or three global funds, but since April this year, at least 10 such schemes have joined the pack. Global funds can be categorised into three broad categories.
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First, there are hybrid funds which invest 65-70% of their corpus in Indian securities and 30-35% in overseas markets. Then there are feeder funds that invest in existing global funds. The Kotak Global Emerging Markets Fund, for instance, invests in units of a T. Rowe Price fund.
There are also fund of funds which invest in a basket of foreign funds. Lastly, there are funds that invest entirely in foreign stocks.Each category gets a different tax treatment. Indian tax laws define an equity fund as one with at least 65% of its corpus invested in Indian stocks. If held for less than a year, there is only 10% tax on the profits from equity funds.
If the holding period exceeds a year, there is no tax at all. Since hybrid global funds invest 65-70% of their corpus in domestic companies and the balance in overseas markets, investors are eligible for the tax exemption on long-term gains.
The profits from other funds that invest in overseas markets are treated in the same way as longterm capital gains from fixed income securities. In other words, if the holding period is less than a year, the profit is added to the investor’s income for the year.
If the holding period is over a year, there is a 10% flat tax or a 20% tax with indexation (which takes into account inflation during the holding period and reduces tax accordingly).
Given this feeder funds and direct investment funds that fall under this category will have to perform at least 10% better if they want to compete with hybrid funds.
WHY INVEST OVERSEAS
Of course, investing in overseas markets may sound unexciting at a time when foreigners are pumping billions of dollars into India. Besides, won’t the appreciation of the rupee against major currencies eat into the profits you make overseas?GLOBAL FUNDS ON OFFER | ||
Fund name and month of launch | Invests in | Tax treatment |
Direct Investing Funds | ||
| Templeton India Equity Income (Apr 2006) | Indian and foreign stocks with high-dividend yield. Annualised returns since launch: 39.06% | 10% tax on profits |
| Fidelity International Opportunities (Apr 2007) | Indian and foreign equities. Annualised returns since launch: 11.78% | |
| ICICI Pru Indo Asia Equity Fund (Sep 2007) | Companies with primary activity in the Asia Pacific region, including India | |
| Tata Indo Global Infrastructure (Oct 2007) | Stocks in Asia Pacific region including India, Europe, Latin America and growing economies | |
| ABN Amro China Fund (Oct 2007) | Indian and Chinese equities | |
| Birla Sun Life International Equity (Oct 2007) | Indian and foreign equities | |
Feeder Funds | ||
| Kotak Global Emerging Market Fund (Aug 2007) | Existing foreign fund called T Rowe Price SICAV Fund | Profits clubbed with investor’s income for the year if holding period is less than a year. If held for over a year, profits are taxed at 10% flat or 20% with indexation |
| DWS Global Thematic Offshore Fund (Aug 2007) | Existing foreign fund called DWS Strategic Global Themes Fund | |
| Principal Global Opportunities (Mar 2004) | Existing foreign fund PGIF Emerging Markets Oppor. Annualised returns since launch: 18.48% | |
| Franklin India International (Dec 2002) | Existing foreign fund Franklin US Government Fund. Annualised returns since launch: —0.82% | |
Fund Of Funds | ||
| DSPML World Gold Fund (Aug 2007) | Existing foreign fund called Merrill Lynch Int Investment Funds and other such schemes | Same tax treatment as in case of feeder funds |
| Sundaram BNP Paribas Global Adv (Jul 2007) | Foreign mutual funds and exchange traded funds | |
True, but foreign markets don’t just mean the US. Other emerging markets have outperformed India in the past one year. The MSCI Emerging Market Index has risen by 43.5% compared to the 36% rise of the Nifty in the past one year.
Even if you take into account the 12% rupee appreciation between September 2006 and September 2007, other emerging markets still outperformed India.
An equity portfolio comprising entirely Indian stocks is like putting all your eggs in one basket, says Rajan Krishnan, business head, Principal PNB AMC.
IS IT FOR YOU?
But don’t rush to invest in foreign markets. Experts say only a small portion of your portfolio should go overseas. R. Venkatraman, executive director of brokerage and advisory firm India Infoline, says not more than 5-10% of your portfolio should be invested overseas. That means global investing is not for small investors with a corpus of Rs 1-2 lakh.
That’s because the foreign exposure would be too small to make a significant impact. Only if your portfolio is worth over Rs 10-15 lakh should you diversify into the global markets. The key is to use foreign investments to spread risk.
Global investing is meant for mature investors looking to diversify risks, not for those who blindly chase high returns, says Anurag Tripathi, executive vice-president of brokerage firm Almondz Capital Markets.
GLOBAL DIVERSIFICATION
Diversifying your investment across the globe is particularly useful when the going gets rough. The Securities and Exchange Board of India (Sebi) note on participatory notes sent the Indian markets into a tailspin in mid-October.
Unless you had Nostradamus as your financial advisor, your stock portfolio and mutual fund investments would have got badly dented. But while the Indian stock markets were reeling, other Asian markets were not doing so badly. For instance, the Hong Kong benchmark index, the Hang Seng, lost barely 0.26% in the four days that saw the Sensex dropping by 8%.
Such divergent movements are not flashes in the pan. Stock markets in different countries often move randomly, reacting to events and policy changes in specific countries. There is no way to accurately predict how different markets will perform.
In 1998, the Bovespa of Brazil was the worst performing index with -33.5% returns while the S&P 500 of the US was at second place with 26.7% returns. Next year, the Bovespa shot up 152% to take the first position while the S&P 500 slipped to second-last position with 19.5% growth.
What does that tell you? That just as you diversify your risk by investing in different stocks and sectors, you could add another dimension to your diversification strategy by spreading your risk across different overseas markets.
WHY FUNDS ARE BETTER
Global investing has become easier now with the RBI relaxing the limits on foreign investments. In April this year, the RBI doubled the ceiling on foreign investments by individuals to $1 lakh (Rs 40 lakh) a year. It is a promising start but there are glitches.
For instance, obtaining regulatory clearances is a complex task. Even if you are able to get past that, you are faced with the tough task of researching companies and sectors in a foreign country. “The current regulatory scenario makes individual stock picking in global markets cumbersome,” says Tripathi.
That’s why it makes more sense to invest through a mutual fund. Mutual funds are for people who don’t have the time, inclination or ability to pick individual stocks.
This becomes doubly true when it comes to overseas markets. You may be able to read up on Apple or Microsoft, but not about smaller gems in emerging markets. There are very few funds that individually buy foreign equities.
That’s because direct stock picking involves a lot of complexities. “Global investing is a specialist function requiring global presence and research across several markets and countries.
That’s why global portfolio management is best left to global funds,” says Krishnan, who manages the Principal Global Opportunities Fund, a feeder fund investing in PGIF Emerging Markets Equity.
THE RISKS
Before you loosen your purse strings to invest in foreign markets, take a look at the risks involved. Besides the normal investing risk, there is a country-specific risk.
Don’t bet on politically unstable countries where civil strife can play havoc with your investments. There is also a currency risk. The 12% appreciation of the Indian rupee in the past year has pared the gains in the US dollar by that much.
Also, watch out for the fine print. In India, there is a 2.5% cap on the annual recurring expenses charged by an asset management company for managing a fund. Find out the expense ratio of the fund you are investing in.
