- May 2014
- December 2013
Ruby Jacob, 08 Jan 2013
The last one week has seen a series of mutual fund companies filing offer documents with securities market regulator SEBI for launching global mutual funds. Yesterday HSBC Mutual Fund filed the papers for HSBC Russia Equity Fund on the heels of Reliance US Equity Opportunity Fund, Franklin Templeton India Feeder Asia LatAM Fund, Axis Asian Asset Income Fund.
More could be on the way. Should this news excite investors? Read on for our view.
What are global mutual funds
International or global mutual funds expose investors' money to foreign economies. Majority of the existing ones we have are fund of funds. This means they invest in a fund or funds (usually managed by the same mutual fund company) that invests in the target economy.
Some global funds like Franklin Asian Equity, Sundaram Global Advanatge are region specific whereas others like Mirae Asset China Advantage, ICICI Prudential US Bluechip Equity are country specific. Commodity based global funds like DSP BlackRock World Gold are also popular.
Why global funds have caught interest
Diversification is a commonly cited benefit offered by global mutual funds. If the Indian economy isn't doing well you can still benefit by having some of your money in other economies that are. Similarly even if you expose to another economy that happens to work in the same tempo as the Indian economy (in technical terms a highly correlated one) you might still make gains due to currency movement. Those global funds focusing on developed economies argue that having exposure to firms that are global leaders can only do good for a portfolio.
Sounds good, right? It may to some but we don't think these international funds are worth a try for salaried investors.
Why global mutual funds lack thrill
There are several reasons behind our opinion. Global funds are sort of theme funds. Unlike diversified equity funds, theme funds have a shelf life after which it would be unproductive to stay in them.
Secondly since most of them are fund of funds, management fees are charged at multiple levels and are obviously higher. Even in this set of applications all except Reliance US Equity Opportunity Fund are fund of funds.
Being fund of funds scheme also implies that the fund managers of these global funds are not equipped to select the right shares from target economies themselves. Investors would be passively relying on fund managers of underlying schemes. This is hardly lucrative. Interestingly hardly 1 or 2 underlying funds out of the 25 existing global fund of funds we reviewed were good investment quality funds.
Fourthly the emerging economies story doesn't sell since India itself is an emerging economy. India story should match with that of the other emerging ones. Until India graduates to a developed economy, investors don't really have to go looking elsewhere.
Equity investment experience is rewarding when investors have a hang of how companies work and the environment they work in. For salaried investors all that is needed to build a strong long term portfolio is a good diversified equity fund. They can ignore global mutual funds.
However big investors, HNIs might find such funds useful as they seriously see the need for diversification. For them it is not so much about getting extraordinary returns from other markets but more about being exposed to markets that have different dynamics and probably offering unique investment opportunities specific to a locality. They are jittery about the current political situation and the investment environment in India and may want to expose some of their portfolio to other markets.