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International Mutual Fund Schemes

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Today we shall discuss about about International Mutual Funds

This is a small topic but will be exciting one, particularly for investors who manage huge corpus of funds.

Also I will explain a practical approach that I am using. (This might not be suitable for all; Sharing for the sake of understanding / knowledge only).

Please understand that this is a extremly high risk topic.

So, do not practically implement this unless you know what risks you are taking.

Just sit back, relax and enjoy reading. But do not get tempted.

My intention behind this lesson is to give an understanding about the concept.

But do not get tempt you to invest into schemes without learning.

Equities as an asset class, in general, is a high risk investment area.

This is because, unlike other asset classes (such as debt, gold etc), the volatility will be extremly high.

Volatility = Upside and downside price moment of the security / instrument (such as equity shares for example).

Now, to reduce, avoid or hedge (de-risk) from equities, we invest in several other asset classes.

Such as in fixed deposits, debt mutual funds or even gold.

The idea is that if one asset class fails to fetch money for us, another would come to the rescue.

Debt funds or gold are the preferred securities to de-risk because they are not as highly volatile as equity shares.

Also, equity and gold move in opposite directions most of the time.

Usually, If equities are up, gold prices goes down. And vice-versa.

Overtime, when u get experienced with securities, you will be investing in almost all asset classes available in the market.

The only asset class most Indian investors wont generally touch is International equities.

Before we enter into detailed talk about this topic, please understand that this topic is for advanced investors only.

This is a extremly high risk area.

If you do not understand your risk profile, better to stay away.

We know that India is the one of the few countries where equities are giving excellent returns.

Most mature markets such as the US, UK and Japan give returns that are far below from what the Indian stock markets are giving.

This is why FIIs and other foreign investors come to India with loads of moneybags to traded and invest in our markets.

If you are a mature Indian investor, you will already be overloaded with several mutual fund schemes.

Unfortunately, most of our schemes will be into equity and debt investments.

So there is still a high degree of risk in this because we are totally dependent on the Indian securities market.

To reduce the risk, it makes sense to invest in securities outside India.

However, this is very difficult.

Because RBI has strict mandates in regard to transfer and investing money abroad.

RBI actually allows Indians to invest up to $250,000 a year abroad into international equities.

Also we are hardly familar with investing in international securities.

But then again you need to have a US-denominated currency account and a trading account there.

Added to this, you need to do stock analysis of foreign equities and then earn profits.

After earning profits, you need to file foreign tax returns etc.

If you see all this, it is more likely to discourage you than make you optimistic.

Yet, there is a solution for this!

You can invest in foreign equities via Indian mutual funds.

By investing in Indian mutual funds that invest in foreign equities,

you can avoid all the hassles involved in being a direct equity investor in international securities.

And yet you can get foreign equity exposure in your MF portfolio.

Added to this, by investing in one fund, you can invest in several foreign shares across several countries.

However, it is not an easy task to find the right mutual fund scheme when it comes to international equities.

I experimented a lot in the area of international investing for several years now and will present only the plan that really worked out.

I will also tell you what and why certain things didnt work for me so that u will avoid falling into such pitfalls.

Definition of International Funds

Like Indian equity MFs, there are several Indian MF schemes that invest in international equities.

This type of mutual fund schemes are called International Funds.

The definition reads:

International funds invest in markets outside India, by holding certain foreign securities in their portfolio.

Eligible securities

An International Mutual Fund can invest in:

  1. Equity shares of companies listed abroad
  2. ADRs and GDRs of Indian companies
  3. Debt of companies listed abroad
  4. ETFs of other countries
  5. units of index funds in other countries
  6. units of actively managed mutual funds in other countries.

International equity funds may also hold some of their portfolios in Indian equity or debt. They can also hold some portion of the portfolio in money market instruments to manage liquidity.

Types of International Funds

Broadly speaking, there are three types of mutual funds schemes that invest in International equities.

1. MFs which invest in one specific country

2. MFs which invest in several countries

3. MFs which invest in a theme / sector

The first two methods are better than the third.

There is another method of classification of India-International MFs

1. Direct equity holding by the MF

2. Fund of Fund method.

In *Direct equity holding by the MF*,

the mutual fund scheme invests directly into the equity shares of the foreign security.

i.e the MF will do all the needful for the investing

- like tracking and shortlisting of good equity shares,

valuation,

investing,

booking profits,

getting the funds back to India and

distributing the profits to Indian investors.

Example: Reliance Japan fund invests in Japanese stock markets direcly.

If you see the factsheet or portfolio of Reliance Japan fund, you will see the names of Japanese stocks only.

Ideally, this is the best approach because the MF can enjoy the profits with less expenses.

In some cases, the fund house will use the expertise of foreign partners in the analysis.

For instance take the example of ICICI Prudential US Bluechip Equity Fund.

This fund invests directly in the US equities.

ICICI Pru MF has a tieup with MorningStar to assist in picking stocks in the US markets.

They have a 3-year deal after which ICICI Pru will use its own expertise in investing.

Will the variation of value of Indian rupee impact the nav of these funds

Sure it does. But the fund manager will take of all such things.

Vijay sir. it is likely that interest rates will be hiked in US in near future. At such times would it be beneficial to invest US based fund schemes.

Our Indian MFs mostly invest in US equities but not in US bonds. So there might not be a direct impact of US rate hike on us.

Further, we are using investing in international funds to de-risk and hedge our Indian investments.

Will taxation on international fund will be different? Or same as Indian equity and debt fund?

Investments in international funds are treaded to be on part with Indian debt funds for the purpose of taxation.

If you have an Indian demat account, you can invest in NASDAQ directly!

NASDAQ is the most popular stock exchange in the US.

It is the NSE of the US markets.

For example, the Motilal Oswal NASDAQ-100 ETF allows you to invest in the NASDAQ 100 stocks.

This is about *Direct equity holding by the MF*

Now lets go to the next method.

The second method is *Fund of Fund method*

In this method, we invest in an Indian mutual fund scheme.

The Indian mutual fund scheme then invests in one or more foreign mutual fund schemes.

The foreign mutual fund scheme then invests in international equity shares.

This is why, these schemes are called *Fund Of Fund* i.e a fund investing in another fund.

For example, take the HSBC Brazil Fund

This is offered by Indian MF - HSBC Asset Management Company

This is an Indian mutual fund scheme

We invest into this Indian mf scheme

The scheme invests further invests in a scheme called HSBC Global Investment Funds Brazil Equity scheme

This HSBC GIF Brazil Equity scheme inturn invests in Brazilian company equity shares.

Understood?

Now look at this small variation.

In the earlier FoF example, 1 Indian MF invests in 1 International MF. Right?

Like Franklin India investing in Franklin US

In some cases, one single Indian MF scheme invests in multiple foreign mutual funds

Why? To diversify the risk.

The disadvantage of this method is that we need to pay expense charges to all the people involved in between.

Actually the fund pays, but utlimately it is the investors money.

Nevertheless, it is worth a try.

Now, lets go to the next type: *MFs which invest in several countries*

In this type of schemes, the Indian MFs will invest in several countries equity shares at once

So, investing in one scheme, you get part shares of several international companies.

Example:

Take for instance Franklin Asian Equity Fund

This invests in several asian country equities in one go.

In some cases,

the Indian MF may invest in a international mutual fund

and the International MF in turn invests in several countries from within its scheme.

An example for this is the Franklin India Feeder - Franklin European Growth Fund

This scheme invests in Franklin Templeton Europe fund

The Franklin Templeton Europe fund scheme invests in several European countries at once.

Understood?

Now, the last type of MF - *MFs which invest in a theme / sector*

This is the most riskiest of all types of MFs.

However, several hundreds of investors have tried (and failed), including me.

In this type, the MF scheme invests in foreign securities based on a theme.

For instance, the DSPBR World Gold Fund invests in gold mining companies across the globe.

The rationale behind this is that gold mining companies will be the first to earn when gold prices goes up.

Similarly, there is a fund called BSL Global Commodities Fund (GCF) that invests in global commodity companies such as oil, agri commodities etc.

We know, commodities follow a seasonal cycle.

If you invest at the wrong time, you will get stuck into the investment for several years.

Even SIP investments will suffer.

So, these are the highest risk schemes one can invest in.

Understood?

Now that we have learnt about all the types of India-International schemes, i will present my selection of schemes that really worked.

I am generally a risk averse investor.

I try to analyze the risks involved before investing (and not after)

The intention of investing in India-International MFs is to hedge or reduce risk exposure from Indian equities.

India-International MFs bring in international risks.

So, i avoided thematic and sectoral MFs because i do not have knowledge in international commodity cycles.

This leaves me to invest in only two type of schemes:

1. MFs which invest in one specific country

2. MFs which invest in several countries

To reduce country overlapping, i studied the country-wise allocations of almost all India-International MF schemes.

Then, to reduce stock-specific overlapping, i listed the names of foreign equity shares that each of the India-International MF schemes or the underlying fund holds.

This info, we get from MF factsheets

This helps us to eliminate overlapping schemes.

I do this filtering process once a month, usually after the factsheet or portfolios are released by the MF.

Finally, i arrived at some handful of schemes.

The idea behind this is that we invest across the globe with as fewer schemes as possible.

So, i selected the funds such that they invest in one country or a group of companies at once.

Here are the schemes that cover *Asia*:

1. Mirae Asset Great Consumer Fund invests mostly in China and HK markets

2. JPMorgan ASEAN Equity Off-shore Fund invests in several small but growing countries.

3. Reliance Japan Equity Fund invests in Japan only

These three schemes cover the entire Asian geography without overlapping of underlying countries or equities

Here are the schemes that cover *Europe*:

1. Religare Invesco Pan European Equity Fund covers entire Europe

2. DHFL Pramerica Top Euroland Offshore Fund concentrates on Euroland (these are some special countries within the Europe)

There is a slight overlap here but because of the numerious countries involves, the overlap is minimal.

Here are the schemes that cover South America:

1. HSBC Brazil Fund

2. Birla Sun Life Latin America Equity Fund

There are no schemes that exclusively cover the African region.

The closest is the JPMorgan EMMA which covers a bit of Europe, Middle East and Africa.

Unfortunately the scheme was merged with the ASEAN scheme.

Finally, for the North American markets, i like

1. Motilal Oswal NASDAQ-100 ETF

2. DSP BlackRock US Flexible Equity Fund

You may choose one of the two because both cover the US markets.

There are no schemes that exclusively or jointly cover Canada. I do not know why.

One fund that is worth mentioning is ICICI Pru Global Stable Returns fund that invests adhoc across several countries globally.

The returns from the India-International MFs are taxable in India by us because they are treated as debt funds.

So, from tax and risk perspective, they are not that great.

But, if you are a large sized investor, having a 5 to 10% exposure to India-International MFs is fine.

This concludes my talk on International Mutual Funds.

I hope u understood atleast a bit of what i was saying.

Why is DHFL Pramerica Global Agribusiness Offshore Fund a very high risk fund?

The scheme has several risks involved:

1. Agri - theme which means it is a thematic investment.

2. Global - which means it invests in several countries round the world and carries currency risk.

Both the factors are dangerous and normal retail investors with low-risk appetite should avoid such schemes.

So, such schemes are for those who have want to add international equity exposure and track global markets meticulously.

  • Dated: March 20, 2017

Emerging market mutual fund schemes

Can we invest in companies which are exposed to other emerging market through MF ?

Which emerging funds are good ?

Indeed. Most Indian Mutual Funds invest in international equities either directly themselves or as Fund of Fund (FoF).

In FoF, the Indian mutual fund scheme invests in an international-partner mutual fund scheme which in turn invests in shares of companies.

Emerging markets is actually a broad-term. And fortunately, there are several mutual fund schemes that cater to the area.

My preferred pick in the segment is Edelweiss Emerging Markets Opportunities. Edelweiss took over this scheme from JP Morgan Mutal Fund.

If you are a high-risk taking investor, you may consider investing in HSBC Brazil Fund which invests only in the Brazil region. Brazil economy was in a bad economic situation and started to recovery.

In both the cases, the investment should for long term.

As usual, invest on your own from the mutual fund website. Go for Direct Plan - Growth Option

  • Dated: March 20, 2017

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