Want to invest in US government securities? Franklin India International Fund is currently the only mutual fund that will do the needful for you. It is a feeder fund that invests its assets in Franklin US Government Fund. The latter, in turn, buys bonds issued or guaranteed by the United States government and its agencies.
If that sounded enticing, here's a reality check. The fund's investors would be a dismayed lot. The fund has performed rather poorly and has been in losses across time periods. Since the start of this year till June 30, 2007, the fund was down 6.81 per cent. The performance record looks equally bad over longer time periods of 1-year (- 6.30 per cent), 3-years (-2.61 per cent) and since launch (-5.32 per cent) as well. But interestingly, the performance of the underlying fund - Franklin US Government Fund- has not been too bad (see table).
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So what has caused Franklin India International to lag so drastically? The fund has been a victim of rupee appreciation. The Indian currency has appreciated significantly against the dollar in the recent months. To be precise, the US dollar has depreciated by over 8 per cent against the rupee in the last three-four months, wiping out Franklin India International's three-year gains.
This clearly highlights the risks involved in investing abroad. While it adds another dimension of diversification to your portfolio, it brings along with it an added dimension of risk too- the exchange rate risk.
As you can see, it has had a particularly harsh impact on a low-yielding fund like Franklin India International.
The low yield offered by US government securities combined with big moves in the rupee-dollar exchange rate have made this fund more of a currency play. This is so because the exchange rate movements are causing a steeper impact on the fund's returns than the performance of US government bonds.
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