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Domestic MFs going global: A double-edged weapon

Aabhas Pandya

It is that nod from the government, which will open the global markets for the Indian mutual fund investors. With the finance ministry reportedly considering allowing Indian mutual fund to invest in global companies, we could soon have our desi AMCs serve an international assortment of investments.

So, move over Infosys, Telcos, HLLs, ITCs and Ranbaxys. Its time investors got a flavour of the likes of Microsoft, General Motors, Mitsubishi, Philip Morris, McDonalds, Yahoo! and Johnson & Johnson (J&J). In fact, most of us are well-versed with the products from some of these companies as we go gaga over Mac's burgers, swear by Yahoo's chat, dream of owning a Mitsubishi Pajero and calculate furiously on Microsoft's Excel worksheets.

Apart from giving us an opportunity to own a pie in some of these world leaders, investments in global companies would provide us with geographical diversification. Thus, in the not so distant future, you may hold an exclusive Japanese fund or a Latin American fund. Or, your fund may own equities (or even bonds!) of companies engaged in lumbering operations in Canada to coffee production in Brazil and excavating diamonds in South Africa to digging oil in the middle East.

"Indian funds can currently invest only in domestic equities and ADR/GDR issues of domestic Indian companies. The advantage to the Indian investor is that they can access international markets and will be able to invest in globally competitive companies. By investing overseas, investors can benefit from geographical diversification," says K N Siva Subramaniam at Kothari Pioneer Mutual Fund.

While Kothari was the first Indian fund to invest in the ADRs of Indian companies, it is also one of the funds to have approached the Securities and Exchange Board of India for permission to invest in overseas equities.

However, it is not all going to be hunky-dory with investments in global companies. While gauging the business model, competitive advantage and future prospects of Indian companies is a big task, analysing the strength of a foreign company is surely going to be a tougher nut to crack. Thus, we could see that fund houses have analysts for specific regions and countries, who exclusively track the events in those areas.

"While investing overseas, the fund manager needs to be alert about any adverse developments in the countries in whose stock markets they have invested. For example, nationalization of local companies, restrictions on withdrawal of capital or change in taxation laws will have an impact on the portfolio," points out Siva at Kothari Pioneer.

On the other hand, the most common threat to the portfolio comes from exchange rate fluctuations, which could happen for a variety of reasons like relative economic strengths, real interest rates, demand/supply and political developments. Thus, if the currency of a particular country (say X) depreciates vis-à-vis the rupee even as the NAV (in terms of X) is going up, investors back home would suffer a loss. In the event of redemption, the fund manager would have to sell more to generate higher units of X in order to match the rupee redemption. "This exchange rate volatility is the key area of concern for any fund manager given the impact any sharp movements can have on the portfolio," says Siva.

When allowed, Indian funds will have to make investments within an annual limit of $500 million, which at current interest rates works out to over Rs 2000 crore or roughly 2.4 per cent of the total assets under Indian mutual funds. Add to it, there is a fund specific limits as well.

While none of the Indian mutual funds have the necessary expertise to invest in overseas equities, fund houses with foreign tie-ups are banking on the expertise of their partners to help them tread on the global highway. "Yes, we believe the Indian funds are geared to invest abroad. The funds with a foreign partner do have an advantage as they can draw on the expertise and experience of their foreign partners," points out Siva at Kothari Pioneer.

So, be it Boeing, Sony, DeBeers or Petronas, just wait a while before the Indians arrive on the scene with their bagful of investments.

Source: Value Research

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