MFs are investing in foreign stks. Does it matter?

Flexi-cap, focused, value, ESG and hybrid funds are today betting on the same thing. All are domestic funds that invest partially in foreign stocks. This tribe of funds taking exposure to global stocks continues to grow. Is investing via these funds the right way to seek international diversification? Are these funds better off than others that don’t diversify abroad?Till recently, hardly any local funds stepped beyond the domestic market. Parag Parikh Flexi Cap was among the few that leaned on foreign stocks since inception. It maintains a steady allocation of around 30% of its corpus to this space. This strategy has yielded huge payoffs. The fund has put up a strong showing for years, even when local market conditions were not supportive. Rajeev Thakkar, CIO, PPFAS Mutual Fund, observes, “Having ability to invest abroad expands the opportunity set for the fund and lowers the volatility associated with pure domestic market bias.” The Rs 14,590 crore fund continues to run the biggest allocation to foreign stocks among peers—both as a portion of its fund corpus (30%) and in terms of capital invested (Rs 4,282 crore).The approach is finding many takers now. Domestic funds—existing and new—are making provisions for allocation towards foreign stocks. A few months ago, PGIM India Hybrid Equity announced plans to introduce international equities to its existing portfolio of domestic stocks and bonds. “Adding investments in international equities can improve risk adjusted return potential over market cycles,” says Ajit Menon, CEO, PGIM India Mutual Fund. SBI Focused Equity is another offering that opened its doors to foreign stocks recently. The Rs 19,429 crore fund currently holds global stocks amounting to Rs 2,695 crore, or 14% of its corpus. A senior official admits this foray was prompted not merely for diversification but also as a means to counter overcrowding in a narrow set of quality companies within the country. Besides, some of the newer funds have made provisions for buying foreign equity from the outset. DSP Value, Principal Large Cap and Axis Growth Opportunities are among recent offerings following this path. Several thematic offerings also take some global exposure.Local funds with global flavourThe number of funds diversifying abroad has jumped manifold in recent years.86702128Experts say this theme of local funds diversifying into global equities is here to stay. Over the years, the case for having international diversification has become more obvious. When domestic market faltered, foreign equities acted as a cushion against large drawdowns. Over the years, the steady dollar-rupee depreciation has also provided another layer of returns to local investors. Vidya Bala, Head-Research, PrimeInvestor.in, insists this shift is also being driven by moderating alpha opportunities for fund managers. “It is very clear that many active funds have been struggling to beat the index. To prop up performance, funds are now investing abroad.”But are these funds the right way to achieve this diversification? Should you instead choose from any of the dedicated international funds in multiple flavours? Experts insist the choice should be guided by one’s needs. Kaustubh Belapurkar, Director-Fund Research, Morningstar Investment Adviser India, says, “If you are seeking generic exposure to global stocks, a local fund diversifying abroad is good enough. But if you crave targeted exposure to a specific geography or theme, then a dedicated global fund is what you need.” For instance, investors seeking participation in the US economy may stick with proven US dedicated funds. Similarly, a targeted bet on global tech or innovation is best played via a dedicated international fund based on this theme.Besides, experts maintain that to reap benefits of global diversification, it should find material space in your portfolio. A 10-15% allocation of your overall portfolio is usually recommended. This is slightly difficult to achieve purely via a local fund. For it to afford 10% global exposure in your portfolio, a fund investing 25% of its corpus abroad would have to make up nearly 40% of your portfolio. This may not be practical. Investors may have to split this allocation between multiple local funds with a global flavour or in combination with a dedicated international fund. Only eight equityoriented funds currently have global exposure greater than 20% of the fund corpus. Another five have between 10-20% and 12 others less than 10%. Bala remarks, “Due to limited capacity, local funds in isolation do not lend for enough portfolio-wide global diversification. One cannot afford to park large sums in a single fund either.”If not bothered with portfolio diversification, a local fund having the option to invest abroad can fetch better risk-adjusted return over long time periods. From a tax perspective, taking foreign exposure through a domestic-biased fund can be beneficial. This is because international funds are treated as non-equity for tax purposes. So they attract debt fund-like taxation. For capital gains to qualify as long term, investors must hold these for three years. Further, gains after indexation are taxed at 20% instead of flat 10% beyond Rs 1 lakh in case of domestic equity funds. When you invest via a domestic fund instead, gains from the foreign equity portion are treated as domestic equity. However, Bala says over longer time frames, return from a dedicated international fund can make up for lower tax benefit.

from Economic Times https://ift.tt/3A4BlPP