Should You Invest In Global Funds?

At a time when domestic stock market is in turmoil, the basic rule of diversification becomes imperative. Today, domestic market is marred by inflation, overheating of few sectors, liquidity crunch amongst corporates, etc. Also, it is likely to remain under stress for, at least, in the short run.  In such a scenario, global mutual funds are an apt choice to diversify portfolio.

The diversification with global funds minimizes your losses in bad times and makes the most of good times. Here, one gets an opportunity to invest at global level, where profits from one market mitigate the losses or problems in other markets during recession. Also, your portfolio grows exponentially with overall growth in boom time.

Choice Availability

The options of investment in global funds have increased manifold in the recent past. From a handful of global funds in 2008, today more than 25 global funds are operating in the domestic market. Besides normal equity investments, global funds offer exposure to gold, debt funds and commodities. As far as global investment in the form of funds is concerned, one can invest in the following options:

• Equity Global Funds, which offer 100 per cent equity exposures across stocks markets of different nations.

• Mix Global Funds are those where one can invest in a mix of equities, commodities, debt funds and/ or agri-business, in a pre-defined ratio.    

• ‘Fund of Funds’ Option is an indirect option to global fund investing. These are Indian mutual funds that invest in foreign mutual funds, instead of investing directly investing into international stocks.

• Partial Global Funds: Global funds are those that invest in global as well as domestic market in a mandated ratio. For instance, most partial global funds in India invest only up to 35 per cent of their corpus into overseas markets to enjoy the tax benefits in India. As per domestic laws, a mutual fund falls in “Indian Equity” category, if it invests at least 65 per cent of corpus into domestic equities.

Points To Remember

Every categories of investment has its own set of merits and de-merits, which you must consider before investing. Here are some of the tips:  

1. Avoid Partial Global Funds: Always choose funds that invest 100 per cent in the overseas market as investment in partial global funds, which invest around 20-35 per cent in international equities market, defeat the whole purpose of global investment. 

2. High Charges in ‘Fund on Funds’: ‘Funds on Funds’ is a costly option as it involves multiple investment vehicles, leading to high charges. This 3-tier structure adds to expense quotient of your fund, which can eat into your yield in a big way, especially in the long-term. For instance, Blackrock World Gold Fund, the parent fund of DSP World Gold Fund, has initial charge of 5 per cent and annual management fee of 1.75 per cent. These charges are levied in addition to your domestic fund charges.

3. Previous Record: If opting for ‘fund on fund’ scheme, one must check the performance record of the fund to ascertain future potential. A check of performance for at least 2-3 years and benchmark the same against global peers will help you judge the future potential.

Is this the right time?

However, when you are considering investment in global funds, one must choose the market carefully. At present, the return potential of US and European market is under serious pressure as the economies of both these continents are struggling hard to keep the investment demand alive. Where on one hand, US continue to witness high unemployment rate along with low resources mobilization and sharp fiscal tightening; on the other hand, the EURO Zone continues to see new countries with prospects of debt default (sovereign debt crisis). The latest additions in the list are Spain and Italy. As per IMF’s recent growth forecast for US and Eurozone, these regions are expected to grow at the rate of 1.6% and 2% respectively as compared to earlier expected rate of 2.5% and 2.7% respectively.

The impact of the crisis is clearly evident in the returns by global funds of late. According to data from Value Research, out of all, real estate, commodities and fund of funds have suffered bigger fall. Global funds, as an overall category, lost 9% against 1.8% fall in BSE Sensex.  With global equity markets in turmoil, the funds investing in overseas equities didn't do too well and hence do not offer a good investment avenue. However, it is to be noted that during the said period, global economy was under pressure and returns have not reflected the full potential of funds.

Emerging Markets: A Long-Term Option

With limited investment opportunities in developed regions such as US and Euro-zone, the investment focus for global funds has shifted to emerging markets. These are fast growing economies just like India, which are buoyant by domestic demand. Emerging markets comprise countries like Thailand, China, Malaysia, Vietnam, South Africa, Mexico, etc. Investment scenario in these markets is lucrative due to low-valuations and strong fundamentals.

India, amongst other emerging markets command supremacy due to sheer size of the market and domestic demand, hence is still a preferred investment destination amongst foreign investors. Moreover, the investment time-horizon has to be long-term, as short-term global outlook is under pressure and may not yield desired returns.

Amongst country specific standalone funds, Japan and China are doing pretty well on the back of strong industrial activities. Some of the emerging market focused funds operating in India are Sundaram Global Advantage Fund, Principal Global Opportunities Fund, Fidelity Global Real Assets Fund, DSPBR World Energy Fund, etc.      

Investment Strategy for Global Funds

Global funds are ideal investment avenue for people who have their domestic fund in order and are looking for additional deployment. Others, for whom investible surplus is a constraint, can give global funds’ investments a miss at this point of time. For them, it’s better to invest in domestic market for long-term as valuations are cheap with bankable business models available. For persons having international exposure, one should not allocate more than 15-20 per cent of its overall corpus.

In addition, the funds choice must be helpful in economy-wise diversification and asset-wise allocation in perspective. For instance, in case of Brazil, investment in Ethanol producing firms is a good idea if you already have fair investments in gold or oil in Middle East countries. Also, one needs to strike balance between debt, equity, agri-business, commodities, etc.      

Recent Performance Chart: Global Funds