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Indian mutual funds (MFs) have long been using the feeder fund route to help local investors add a foreign flavour to their portfolios. Now, even funds with an India-specific mandate are allocating a part of their capital to foreign equity securities.Acknowledging the need for diversification, and willingness to look beyond local growth opportunities have resulted in the rise in allocations abroad; according to fund officials. India-specific funds have allocated in excess of Rs 1,000 crore to foreign securities, show data from MF tracker Value Research at the end of the March quarter.
“Today, we live in a globalised world. When you buy an Indian steel or automobile company, you are also betting on the performance of its overseas subsidiaries. Similarly, a lot of companies listed abroad derive their value from India. Essentially, you need to look beyond borders for a well-rounded portfolio. It has helped us bring about reduction of volatility, and country-specific risks,” said Rajeev Thakkar, chief investment officer & equity fund manager at PPFAS Mutual Fund.
PPFAS Long Term Value Fund’s largest holding is Google, to which it has allocated 9.15 per cent of its assets. It has the mandate to invest up to 35 per cent of its assets in foreign equities.
Gautam Sinha Roy, fund manager at Motilal Oswal Asset Management Company, said the Motilal Oswal MOSt Focused Multicap 35 Fund has retained the flexibility to invest abroad, which would mean it has the ability to tap all possible opportunities, including those which are not in India. The latest figures show 3.85 per cent of the portfolio is currently allocated to Warren Buffett’s Berkshire Hathway Inc. It can invest up to 10 per cent of its assets in foreign securities.
At March-end, Motilal Oswal's Focused Multicap 35 Fund had allocated Rs 62 crore abroad, while Parag Parikh Financial Advisory Services Long Term Value Fund has allocated Rs 136.6 crore. The Franklin India Bluechip Fund held over Rs 300 crore in foreign equities, show Value Research data. There are eight other funds that also allocate a part of their assets to foreign equity securities. The investments include stocks in Switzerland, Great Britain, United States of America and Belgium. The median allocation of these funds to foreign equity is around five per cent, show Value Research data.
This is in addition to dedicated foreign feeder funds whose assets have increased to over Rs 3,000 crore. There were 47 schemes with the specific mandate to allocate capital abroad, show the data, from the beginning of the year with each of these managing an average of Rs 66.29 crore.
The feeder funds invest in global agriculture businesses, commodities, real estate, other emerging markets, technology companies. They invest in China, Japan, Europe and Brazil. They charge an average of around two per cent as expense ratio. This means that investors pay under two rupees a year for every Rs 100 invested.
“There are some who invest in it for diversification purposes, but this number is still low. It should grow…but demand has been affected by taxation issues,” said Jisang Yoo, chief executive officer at Mirae Asset Global Investments (India).
Investors have to pay no taxes on gains from local equity funds if they hold that for at least one year. Current laws tax investors and treat funds with less than 65 per cent allocation to Indian equities as debt funds. This means that most feeder funds are required to pay 20.6 per cent on gains if redeemed after three years.
The government taxes investors as per their income tax slab if redeemed before three years.
