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Dilemma of Foreign Funds

Investors must decide whether returns should dominate benefits of geographical diversification

Diversification is good. But how much diversification is best? And should you keep your investment diversification plans confined to within Indian borders or look beyond them? According to most advisers, diversifying your portfolio by investing abroad is a paying, as well as a cautionary exercise, and the effort is well worth the trouble.

But this aspect of investing needs to be looked at closely, especially on the performance of foreign funds of Indian mutual fund houses which invest abroad on behalf of Indian customers.

Data reveals that these foreign-bound funds have not really delivered when compared to the returns of India-based diversified equity funds. Keeping this in mind, while no one is arguing against geographical diversification, there is surely a need for a re-rating exercise.

To be sure, Indian diversified equity funds were expected to beat all those funds that invest abroad on behalf of Indian investors, simply because Indian stock market indices have beaten the heck out of the foreign bourses, being among the top performers. That means funds looking to invest abroad were fated to lag as other markets fell behind India. Aside from India, the only other indices that have done well are in Brazil and Russia, where the Bovespa has returned 49 per cent and RTSi has returned 47 per cent - Sensex gain was 43 per cent and Nifty 40 per cent (1-year period).

Out of the 14 international funds that are over 12 months old, four funds have given returns between 50-to-70 per cent, 4 funds have given returns between 40-to-50 per cent, while 2 funds have given returns between 30-to-40 per cent. Four funds have given returns between 2-to-20 per cent. Importantly, none of them is in the negative terrain, but if you take them as a category, then they have delivered an average of 36.18 per cent.

In comparison, the diversified equity constellation that includes over 200 funds, have beaten these funds’ performances by posting returns of 49.33 per cent as on October 9, 2009* for the same 1-year period.

If you look at 6-month returns, then the scale tilts in favour of the diversified equity funds even more as they have delivered returns of over 62 per cent, while the international funds are at 38.98 per cent.

The best performing international fund was ING Latin America Equity, followed by Mirae Asset Global Commodity Stocks.

These gains were put in shade by the equity diversified category in India, with the top three funds giving returns of 70 per cent.

While these kinds of data may be pointing away from diversifying geographically, but the overall gameplan that an investor should be looking at is not just maximizing returns, but also security of the investment (via diversification, including geographical ones). In case Indian markets dip, for whatever reasons (since the global meltdown has proved they can be very irrational), it would be better for investors if they have some of their eggs in foreign baskets too.

Also, do be aware of the fact that during the global meltdown, hedging, and even asset allocation, could not stop the global stock market freefall from crushing the portfolios of even the best investors, including stock market guru Warren Buffet.

But then, these kind of mass-scale destructive events are few and far between and can't be taken as a given.

For those who feel geographical hedging is a necessity, then they should consider investing some 80-to-90 per cent of their investment amount in India-based funds while the rest goes overseas, according to Financial Chronicle. The best scope is for the long-term investors as the markets abroad and Indian markets may align in a timeframe that stretches across 3-5 years.

*1-year diversified equity returns on October 12, at the time of finalizing this story, jumped to as high as 62 per cent on the back of Sensex rising 384 points, up 2.31 per cent on Monday from its previous close, while the broader-based Nifty on the National Stock Exchange jumped up 2.21 per cent, taking the former above 17,000-pt mark and the latter above 5,000-pt mark.

Foreign Returns
Fund  Launch  1-Month  3-Month  6-Month  1-Year
ING Latin America Equity Jul-08 6.60 32.75 51.07 67.80
Mirae Asset Global Commodity Stocks Jul-08 3.41 29.62 53.82 61.43
DSPBR World Gold Reg Aug-07 2.16 27.83 34.26 59.68
AIG World Gold May-08 2.99 35.26 43.03 58.91
HSBC Emerging Markets Feb-08 2.46 19.39 38.56 42.92
Principal Global Opportunities Mar-04 3.14 21.35 38.75 42.72
Tata Growing Economies Infrastructure Plan A Mar-08 3.44 19.42 53.20 40.64
Franklin Asian Equity Dec-07 0.88 12.44 34.50 40.40
ING OptiMix Global Commodities Aug-08 0.32 24.32 34.13 33.28
Sundaram BNP Paribas Global Advantage Jul-07 2.43 20.34 40.58 30.55
DWS Global Thematic Offshore Aug-07 0.13 13.20 23.72 15.40
Birla Sun Life International Equity Plan A Oct-07 -0.44 14.28 18.63 7.04
ING Global Real Estate Inst Mar-08 -0.51 24.44 40.75 2.89
ING Global Real Estate Retail Dec-07 -0.55 24.55 40.75 2.86
Diversified Equity Funds (Category)    3.86  22.79  62.14  49.33
Returns (%) as on October 9, 2009
Note: 3 Funds were not considered as they are not yet 1-yr old. These are: DSPBR World Energy Inst, DSPBR World Energy Reg, JP Morgan JF Greater China Equity Off-shore