You need a permanent account number (PAN), you need to find out how your earnings will be taxed and you need to choose from hundreds of equity schemes from some 44 managers. But, taking all this trouble seems worthwhile for a foreign investor, since the returns from domestic funds are much better than those given by offshore funds.
An offshore India fund is one domiciled and sold in foreign locations but invests primarily in India. This is one of the primary investment vehicles for foreign investors. About 250 offshore funds invest in India. Domestic funds are mutual funds registered under the Securities and Exchange Board of India (Sebi) rules. In August, the regulators allowed investment by foreign nationals and institutions directly into domestic funds.
If a foreign investor had invested $1,000 in the top performing offshore fund five years earlier, he would have earned $35 more than what the benchmark S&P CNX 500 index that tracks the top 500 companies on the National Stock Exchange had returned. If he had made the same investment in a top performer among domestic MFs, his excess returns would have been $234.
| LOCAL FLAVOUR Funds outperforming S&P CNX 500 | |||
| Offshore funds | 1 -year | 3-year | 5-year |
| % of funds that outperformed | 66 | 41 | 36 |
| Number of funds | 122 | 101 | 69 |
| Domestic Funds | |||
| % of funds that outperformed | 64 | 51 | 69 |
| Number of funds | 91 | 76 | 58 |
| Source: Mercer | |||
And, not only the top performing schemes. Domestic funds outperformed their offshore counterparts across even the median and lower quartile fund returns.
According to data from Lipper, analysed by Mercer, only 36 per cent of offshore funds outperformed the benchmark index over the five years ending October 31. However, 69 per cent of the domestic funds outperformed during the same period.
Even over a three-year period, domestic funds did better, with 51 per cent outperformance against 41 per cent of foreign funds beating the index. Domestic fund managers have the advantage of having a close rapport with company managements. They are also better placed to analyse the numbers of portfolio companies and put these in the context of local developments. These factors help them beat the foreign managers, said experts. “A possible explanation for the superior performance of domestic funds compared to offshore funds may rest in local knowledge being an advantage,” said Mercer analysts in a report titled, ‘How investors can participate in India’s growth story’.
This has led to local managers consistently doing better over the years. An analysis of monthly returns for the three years ending this October showed the median return of offshore funds had outperformed the index 37 per cent of the time. During the same period, the median return of domestic funds outperformed 78 per cent of the time.
