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Indian money on a global tour

August 03, 2009 10:18 IST

Indian investors have been witnessing a larger choice in terms of their mutual fund investments. This is now being broadened with the launch with a variety of international funds that will jostle for space in their portfolio.

The increasing choice will also mean new decisions to be taken by investors, because they will have to see whether the new funds match with their requirements. With their investment horizon now stretching across the world, there is an added benefit that can be used by investors in ensuring they are able to build a quality portfolio.

International funds

International funds are those MF schemes that invest a part of their corpus in equities or debt in foreign countries. This allows the Indian investor to get an exposure to foreign markets and investments without having to use foreign currency.

It thus becomes a route to diversify the portfolio across countries and geographies, so it is a useful tool to consider for investors who have a broad portfolio.

Indian mutual funds now provide investors an option to invest in the markets of both developed as well as developing countries and hence there is a wide choice available.

There are a couple of routes used by MFs in terms of the structure of the schemes they make available for investors. One of these is to have direct investments into the equities in other countries.

The second route commonly used is to have an investment in another fund, which has investments in foreign companies, and this is known as a feeder fund. Another variant is that the scheme will invest in multiple funds that have foreign investments, making it a fund of funds.

New funds and performance

There are several new funds being launched or that have been launched in the past year. Some of the funds that are open for the purpose of investment include the JP Morgan JF Greater China Equity Offshore Fund and DSP Blackrock World Energy Fund.

Emerging market funds and gold and other mining companies have been launched in the past and these are open for investments for investors on an ongoing basis.

It is also interesting to see how existing schemes have performed. On this front, there has been a mixed bag and at the same time the figures are not exactly comparable, because each of the funds have a different investment guidance and outlook.

Franklin Asia Equity Fund has notched a 12 per cent return and there is a large foreign component of the portfolio that has boosted return here. Fidelity International Opportunities has returned around 4 per cent in the past year, while Pru ICICI India Asia Equity Fund has a 5 per cent return and Fortis China India is slightly better than 6 per cent. All these schemes have a majority investment in Indian equities and only a part in foreign equities.

DSP World Gold Fund, which invests in mining company stocks across the world, has a slightly negative return. While AIG Gold Fund has ended on the positive side. The average cost of the funds that invest in both Indian and foreign markets is around the 2.1-2.5 per cent mark.

Franklin India International Fund invests in foreign debt markets in US Government securities, so this stands apart as another type of fund and this has returned double-digit figures in the past year due to the recent rally in the US securities market. This has an expense ratio of around 0.75 per cent, which is lower due to it being a debt fund.

Taxation

In terms of the taxation of these funds, their portfolio plays a very important role in determining the impact. If the average equity component of Indian equities is 65 per cent or more of the holdings, then the scheme will be classified as an equity oriented one for the purpose of tax benefits in India.

This means there is no dividend distribution tax and the long-term capital gains will have a zero tax rate, and the short-term capital gains will have a 15 per cent tax rate. This will include all those funds with a mixture of Indian and foreign equity, and at the same time, over 65 per cent of the equity is in Indian stocks.

Funds which invest in other foreign funds, including feeder funds and fund of funds, will be classified as a debt scheme and there will be a dividend distribution tax on the dividend paid by these schemes.

In addition, the short-term capital gains will be added to the income, while the long-term capital gains will be taxed at 10 per cent without indexation or 20 per cent with the benefit of indexation.

Investors can plan their investments in such a manner that around 10-15 per cent of their portfolio is invested in such schemes, as they will provide an exposure to other securities and countries, which would not be possible in other circumstances. This will lead to the required diversification of the portfolio.

The author is a certified financial planner
Arnav Pandya in Mumbai
Source: source
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