Investors stay put in overseas funds despite deep corrections in markets

Maturity in dealing with equities, taxation likely reasons as schemes see positive flows even after 25-35% correction

Indian investors with allocations in international mutual fund (MF) schemes remained unfazed by the deep corrections in global markets in 2022.

Data released by the MF industry shows that fresh investments in international fund of funds (FoFs) outweighed the redemptions in ten out of 12 months in the December 2021 to November 2022 period.

The continued flow of fresh investments also ensured that the assets under management (AUM) of international FoFs do not shrink by a big margin.

The AUM declined only 15 per cent in the last one year – from Rs 24,000 crore to Rs 20,300 crore -- even as some of the most popular schemes have declined 20-30 per cent.

Data from Value Research shows that FoFs investing in US tech funds have seen the highest corrections in the last one year. Popular schemes like Edelweiss US Technology Equity FoF, Mirae Asset NYSE FANG+ ETF FoF and Motilal Oswal Nasdaq 100 FoF are down 25-36 per cent in the last one year (as on January 5).

Industry executives and investment advisors see a variety of factors behind investors' decision to stay invested. The first being a rising understanding that equities are a volatile asset class, meant for long term investments.

"It shows a certain level of maturity among investors. There was no panic selling which would have been the case a few years back," said Suresh Sadagopan of Ladder7 Wealth Planners.

"We received no calls from worried investors. We generally counsel our clients before adding a new asset class to their portfolio so that they are prepared for such scenarios," he added.

The other key factor is taxation. Though international FoFs invest in equities, the returns are taxed like debt funds in India. Investments for a period less than three years are classified as short-term and taxed as per the applicable income tax slab. Gains from investments of over a 3-year period attract 20 per cent tax with indexation benefits.

Experts say that since the taxation is generally higher on short-term gains, investors coming into international MFs come for a longer horizon.

"People investing in international funds have a longer horizon because there is tax consideration. Since offshore funds are taxed like debt in India, people come in with a long-term investment mindset," said Siddharth Srivastava, head, ETF products, Mirae Asset Investment Managers (India).

According to Srivastava, the continued inflows indicate that investors may have used the corrections as an averaging opportunity. "Investors are worried for sure. Performance of international funds is way poorer than domestic funds. But a lot of the existing investors may have stayed put as they have a positive long-term outlook for a particular sector or a market. For example, at the company level, there is not much of a problem with US tech stocks. The correction is mostly due to macroeconomic factors," he added.

Deepak Jaggi of Satco Wealth points out that the allocation towards international funds is only 5-10 per cent of the portfolio for most investors. "Hence, at the overall portfolio level, the losses do not seem that big to them to get worried," he said.

Satco has recommended its clients to redeem their international investments and park it in a domestic fund even though they would have to bear losses. "Even if the rupee depreciates 3-4 per cent per annum, international funds are unlikely to outperform domestic funds. The Indian equity market looks good from here for the next 5-10 years. A lot of our investors including NRIs have increased their India allocation," Jaggi said.

Sadagopan says he is not recommending fresh investments in international funds due to prevailing uncertainties and limitations on international investments by MFs. "There are limited funds which are accepting inflows. And even they might stop taking fresh money after their AUM reaches a certain level. One cannot do asset allocations amid these uncertainties," he said.

Almost a year back, the Securities and Exchange Board of India (Sebi) had advised MFs investing in overseas securities to stop further investments in foreign stocks to avoid breach of industry-wide overseas limits.

They were later allowed to resume subscriptions and make investments in overseas funds/securities up to the headroom available without breaching the overseas investment limits as on February 1, 2022.