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Exchange Rate Reward

Franklin India International relies too much on US factors...

Franklin India International scores on diversification - geographical and currency. But where it failed was on the performance front, the one factor that ultimately matters.

Launched in December 2002, this open-ended income fund, struggled to justify its presence at a time when the thirst for equity could not be quenched. But of late, there has been a turnaround.

The scheme invests in units of Franklin US Government Fund, an international mutual fund scheme from Franklin Templeton. This fund invests predominantly in securities issued or backed by the U.S. Government. The returns of these instruments (U.S. Government Securities - Ginnie Maes) are not high and are a function of the domestic interest rates in the U.S. Add to this the currency bet and you have too many uncertain variables affecting the performance of the fund.

If one were to look at returns generated by Franklin India International (the feeder fund) and Franklin US Government Fund (the mother fund), the situation is not appealing. The mother fund in the last three years delivered an annual return of just 4.42 per cent, which is at least better than the Indian version which yielded 3.30 per cent. Over the past five years, the mother fund gave 4.29 per cent, but feeder fund returned 2.61 per cent.
The Indian fund has failed to live up even to its American counterpart.

One cannot blame investors for cutting their losses and running. The fund, which started with Assets Under Management (AUM) of around Rs 8 crore in January 2003, now has less than Rs 1 crore in assets (September 2008).

Now that we are done with the bad news, let's look at the turn of events. There has been a twist in the recent performance of Franklin India International Fund, much of which can be attributed to the rupee-dollar exchange rate.

One just has to look the table and can easily figure out that the 'supposedly good returns' in the recent past have coincided with the rupee depreciating against the dollar. When the rupee depreciates, returns from foreign investment will be enhanced. From the start of the year till October 22, 2008, the fund returned 22.60 per cent (year-to-date returns).

Can't blame anyone. This fund is held hostage to interest rate movements and exchange rate fluctuations. It can only generate returns in two scenarios. One is when interest rates are low in the U.S., which will keep bond prices. And the second is if the rupee continues to depreciate against the dollar back home, which has been the case recently.

But how long will this situation last? No answer to that one.