5/28 Prajna Capital - An Investment Guide

Go global. Is it the time to invest in Global Markets? May 26, 2009 at 10:17 pm

Still one can bet on global funds as a means of portfolio diversification. Coming after a week when financial giants have collapsed and the world looks on in confusion, it may seem strange to say that investors should still look towards investing in global funds. But financial advisors still believe that you should consider global funds as a means for portfolio diversification and gaining exposure to different asset classes, investment styles, sectors and so on. To make things easier, this article gives you the how and why of investing in global funds. MORE Diversification / OPPORTUNITIES Investors should view global funds as giving them the chance to participate in opportunities and themes that are not available in the country such as investing in gold mining or metal companies or those sectors which are highly regulated in India like oil and fertiliser and to benefit from the boom in these sectors. Global funds also help you make the most of the strengths and the growth characteristics of other countries, which are governed by different, factors and have different cycles. Geographical diversification thus helps you reduce risks and brings more consistent returns. CHECK THE CORRELATION For those who are still raising their eyebrows in scepticism, and are concerned about the interlinked nature of economies, financial experts have a few explanations. In spite of an increasing integration of global markets, the correlation between India and other markets, whether developed or emerging remains low, somewhere between 0.3-0.5. This means that even a basic level of geographical diversification can add stability to an investor's portfolio. Also, while certain markets have corrected sharply, there are others that did not face correction to that extent, owing to large domestic consumption and a powerful investment cycle. However, investors need to remember there will always be some markets which are underperformers and others which are out performers and that they need to look at systematic investments into global equity funds to mitigate the impact of event risk. Investing via the global fund route also gives you the added benefits of an experienced fund manager or a team of experts who follow the course of the market and handpick stocks that will help them achieve their investment objectives. PROFIT ROUTES If you are convinced that global funds may be a good option for you, then the next step is to determine their mode of functioning. Many global funds invest directly into reputed stocks abroad. However, some others choose to invest via a fund-of fund route, where the money you invest in a global fund is further invested in a mutual fund, which then invests in stocks in a particular country. You need to watch out as this could make a slight difference to your expenses. In case the fund takes a fund-of-funds route, the investor does not have to pay a double entry load. However, there is a double layer of expense ratios, which may affect the returns in a fund-of-funds. As per regulations in India, mutual funds are subject to a cap of maximum of 2.5% on expenses. The same will apply in the case of global funds run from India. KNOW THE MARKETS While most investors interpret global to mean the US or Europe, global funds do not go by this definition. On the contrary, many of the funds today are looking at Asia and other emerging economies as well, which show good potential for growth or have some inherent strengths or natural resources. While it is crucial to look at the track record of the fund house and to determine whether its investment objectives are on the same track as yours, it is also imperative that you know a little more about the economy that you are investing in. Investors need to believe and back the theme that they are investing in by dedicating the required time for the investments to perform. Hence, proper due diligence by the investor in terms of a feasibility analysis of the economies being invested in is critical. The other factors that could aid you in your decision are liquidity, transaction costs and risk-return ratios of the fund. DIVISION OF INVESTMENT Another thing you need to keep in mind is that global funds do not always invest entirely in global stocks. On the contrary, you will find that many of the global funds in the market are seen to invest about 65% in the domestic market and allocate only the remaining 35% to global investments. "With 65% in Indian equities, investors enjoy the prevailing tax benefit of long term capital gains applicable to all Indian equity funds. There are also other funds that invest 100% in global stocks and ultimately it is up to you to decide what suits your investment plans. However, experts recommend that investing in global stocks should only be undertaken after one has suitable exposure in domestic markets. RISKS You should, however, not neglect the risks involved with investing abroad. The performance of global funds can easily be influenced by any political, economic and regulatory developments in the country of investments. Moreover, there is always the risk associated with sudden rises and dips in the exchange rate. However, currency delivers only a small component of a fund's performance.