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Why global funds aren’t exciting enough
The last few months have seen a spate of global fund
launches, which has created a buzz among investors. Some investors
(rightly) look at these funds as a means to diversify across
countries/economies, while some look at them as novel investment
avenues, the way they would look at many of the domestic NFOs (new fund
offers).
By and large, investors have not quite taken to global
funds for a variety of reasons; some of these are related to tax
(ironically, according to domestic taxation guidelines, global equities
are at par with debt, so global funds are treated as debt funds from a
taxation perspective); while product complexities and sheer indifference
rank as lesser reasons.
At Personalfn, we have advised investors not to rush
into investing in global funds just as yet. Some global funds have
already been launched, while many more are on the way. We have
recommended that as more and more global funds get launched, visitors
can evaluate comparable global funds across parameters (the fund’s
investment proposition, its processes, long-term track record across
market phases, especially the downturns) before taking an investment
decision.
Our lack of interest in the global funds that have been
launched in the recent past stems mainly from three reasons:
1) Higher allocation to Indian equities
Many of the global funds that have already been launched in the past
(like the Templeton India Equity Income Fund and Fidelity International
Opportunities Fund), as also the recently-launched NFOs like ICICI
Prudential Indo Asia Fund are mandated to invest at least 65% of their
assets in Indian equities. In other words, only 35% of assets can be
invested in global equities. Despite that, these funds are termed as
global funds! By that logic, equity-oriented funds/balanced funds that
invest at least 65% in equities should be considered as debt funds by
virtue of their 35% debt investments!
We can appreciate that these funds are pre-dominantly
invested in domestic equities because domestic laws accord equity status
(from a taxation perspective) only to domestic equities and not to
global equities. So in their bid to qualify as equity-oriented funds,
many of these so-called global funds are pre-dominantly invested in
domestic equities. Given that these funds are pre-dominantly invested in
Indian equities, they should not be marketed by fund houses as global
funds.
From the perspective of an investor seeking a global
investment avenue, clearly he must choose between being invested in the
right avenue (in this case, predominantly in global equities) and being
invested in an ‘equity-oriented’ avenue (an Indian equity fund that can
invest no more than 35% of assets in global equities). Our
recommendation is that investors go for the former i.e. global funds
that invest predominantly in global equities. Even if these funds are
classified as debt funds in our view, principles of financial planning
(like diversifying across economies/countries) cannot be dictated by
taxation laws. If you must diversify, then you should diversify
regardless of the tax status of your investment. In any case, it is
probably only a matter of time, before the laws are adjusted to accord
global equities a status at par with domestic equities.
2) Higher allocation to Asia/emerging markets
Many of the recently launched global funds (like Sundaram BNP Paribas
Global Advantage Fund, Kotak Global Emerging Market Fund, ICICI
Prudential Indo Asia Fund) have chosen to invest largely in
Asian/emerging market economies. Again this beats the purpose of global
diversification. By investing primarily in Asia/emerging market, these
funds qualify as Asian/emerging market funds, not true blue global
funds.
In our view, an Indian investor already has a flavour of
investing in Asia by being invested in Indian equities. To diversify
globally, he does not need to invest in more of the same (although
different countries, China, Russia, Brazil and many of the other
emerging economies are bracketed along with India in terms of growth
potential). The Indian investor needs to diversify across
countries/economies that have dynamics very different from the Indian
economy. In other words, he needs to diversify across both developed
economies and emerging economies and not just the latter. Global funds
that do not allow for this, are not presenting Indian investors with an
ideal diversification avenue.
3) Too many fund management levels
Most Indian fund houses do not have an expertise in managing global
equities (although many fund houses do have tie-ups with foreign
partners); they have nonetheless gone ahead and launched their global
fund offerings. To facilitate this, they have opted for the FoF (fund of
funds) route. Put simply, there are designated global funds wherein the
Indian fund houses will invest their monies. The global funds in turn
will invest in global markets.
So what does this mean to the Indian investor? A lot.
For one, the Indian investor does not really know the global fund
wherein his money will be eventually invested. He only knows the Indian
fund house where he is investing the money. This fund house in turn will
invest the money in a global fund. So there are two levels of fund
management – one at the level of the Indian fund house and the other at
the level of the global fund that will actually be investing the money.
As an investor you don’t know the global fund that is investing your
money and are relying totally on the Indian fund house for this, which
may or may not have an existing association with the global fund.
Investors must appreciate that although they are investing with the
Indian fund house, there is an onus on the latter to identify the right
global fund.
Moreover, two layers of fund management mean two layers
of expenses (fund management expenses, marketing expenses, and admin
expenses to cite a few examples). That is one reason why an FoF is
usually not a very cost-effective way of investing your money.
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