Desi charm may hold back MFs' overseas trip

Domestic markets look more favourably poised.

The Budget proposal to raise domestic mutual funds' foreign investment limit may not result in a rush of international equity fund offerings for investors here.

The reason: Considering the growth rates, domestic markets look more favourably poised than the global ones.

However, those funds which have indicated in their offer documents that they would invest in international equities would now be able to get some international flavour in their portfolios, fund managers said.

"Developed markets, where investors may be more comfortable investing in, do not offer great return potential. But certain emerging markets such as Brazil or Russia offer good potential and may even fare better than India. However, investors may not be comfortable investing in those markets as of now," said Nilesh Shah, head of equities, Kotak Mutual Fund.

So far, even though the limit on overseas investments is $1 billion, mutual funds' investments in overseas securities currently is substantially below the threshold limit at $5 million.

"Domestic funds have not been enthusiastic in launching international funds since our markets have been performing significantly better than other markets and moreover, the investment universe has been far too restrictive," said Sameer Kamdar, national head - mutual funds, Mata Securities.

Since the regulations required mutual funds to invest only in foreign companies which had at least 10 per cent stake in listed Indian companies, the choice was limited to some 50-odd stocks.

However, now they will be able to invest in sought-after foreign companies such as Microsoft, Google and Yahoo! or any other companies with unique business proposition that can be valuable addition to their portfolio.

Since the doors are now open, investors can make use of opportunities as and when they are available. Over the past few years, domestic indices have fared substantially better that the US ones.

For the past three years, while the Sensex gained 46 per cent, the tech-heavy Nasdaq posted 19.48 per cent gains. S&P 500 and Dow were far behind at 11 per cent and 15 per cent, respectively.

On the contrary, a glance at the MSCI country indices reveals that several other emerging markets fared better than India: Indonesia (51 per cent), Argentina (58 per cent), Brazil (76 per cent), Colombia (107 per cent), Czech Republic (60.19 per cent), Egypt (127 per cent), Jordan (57 per cent), Russia (54 per cent) and Turkey (69 per cent).

Currently, there is only one international equity fund in the country which is managed by Principal PNB Asset Management Company. Its performance has been pretty miserable.

While diversified equity funds have posted an average return of 55.78 per cent during the past one year, Principle Global Opportunities Fund, which invests in overseas equities, was at the bottom of the pack delivering a meager 14.38 per cent return.

The fund's top holdings at the end January included Nestle SA (Switzerland), SKF (Sweden), Mitsubhishi (Japan), Atlas Copco (Sweden) and Ingersoll Rand (the US). The fund was launched in March 2004 and has been a non-starter with a corpus of Rs 13 crore currently.

Rajat Jain, CIO of Principal PNB AMC, said, "We are excited as we would now be able to look at a wider range of securities in the overseas markets."

As part of the Budget proposals the FM hiked the cumulative investments of domestic funds in overseas markets from $1 billion to $2 billion. He also removed the 10 per cent reciprocal foreign shareholding to give funds a bigger basket to invest in.