Hiren Dhakan, Associate fund manager, Bonanza Portfolio
Global mutual funds seem to be the flavour of the season with most financial advisors . And why not? These funds have given nearly four times the returns of the domestic markets . But before you jump in to ride the bandwagon, it's essential to be aware of littleknown facts about such funds that may get overlooked when your advisor highlights their USPs.
GLOBAL FUND SHOULD BE GLOBAL: If you are looking for global exposure, it's very important to choose the right fund, because in India, some mutual fund schemes, although mandated to invest in global equities, have allocations heavily titled towards domestic stocks. The global exposure can be as low as 20% to 25% of the fund's assets. Such low allocation dilutes your portfolio's consolidated exposure to the global markets. Your investment goals could then go for a toss.
DIVERSIFICATION: Investors often invest in global funds without caring about the economies and regions the fund is targeting. It's important to note that the true benefit of global diversification will be achieved only when you diversify across economies that react differently to global events or at least share low correlation with each other. With a majority of your portfolio invested in India, you would not derive much global diversification if your fund invests in other emerging economies like Brazil and China as these markets usually move in tandem.
HIDDEN EXPENSES: Some global funds are feeder funds - they invest their corpus in their parent fund abroad, which, in turn, would invest in global equities. This three-tier structure adds to the expense quotient of your fund, which can eat into your yield in a big way in the long term. For instance, Blackrock World Gold Fund - the parent fund of DSP World Gold Fund - has an initial charge of 5% and annual management fee of 1.75%. This is over and above what your domestic fund charges you.
ADDITIONAL RISKS : If your investment goes global, your risk does, too. Global investments will be subject to geo-political, economic, and country-specific risks, and also currency fluctuations. So, your global fund will be more prone to the Japanese tsunami and Greece default than an Indian fund. This, however, need not necessarily be the case, as India itself is a high-beta emerging economy and different countries react differently to news flows.
TAXATION: Global funds are treated as non-equity funds and taxed accordingly. Thus, long-term capital gain, ie, profits booked after one year of investment, would be taxed at 10% without indexation or at 20% with indexation. Short-term capital gain would be taxed as per your tax slab. Thus, it could be as high as 30%. But, if your fund has a mandate to invest at least 65% in Indian equities and the rest in foreign securities, it will be at par with Indian equity funds and treated accordingly for tax purposes.
TRACK-RECORD: If you are going for a global fund-of-fund, your fund-selection task can be easier as these funds invest their corpus in their parent global funds that have been in existence for some time. You can track the performance of the parent funds for the last three to five years (wherever possible) and benchmark the same against global indices like MSCI World Index or MSCI EMEA. Thereafter, you can take the final call on whether to invest in it or not.
NOT MEANT FOR EVERY INVESTOR : If you are a new investor, global funds may not be for you not only because of the risks involved in them but also because India is now amongst the best-performing markets globally. Global funds are ideally suited for those who already have their core equity portfolio in place and are looking for some additional equity diversification globally. However, make sure these funds do not constitute more than 15-20% of your portfolio. Amongst global funds, after some introspection, one needs to choose a fund that matches his/her investment needs - both in terms of economy-wise diversification and asset-wise allocation
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