Somewhat unusually, this issue of Mutual Fund Insight has a cover story about a category of funds that are an utter failure in India - failure not as investment vehicles but in terms of the response of investors. This saddens me tremendously because I feel that the case for putting some of one's money into international funds is pretty clear.
International funds have now been around in India for over 18 years and after all this time, a mere 0.3 per cent of the total investment in equity funds is in international funds. That's about Rs 2,300 crore out of Rs 8 lakh crore. Clearly, at this point of time, Indian mutual fund investors' interest in international funds is just a rounding error.
You might think that maybe, Rs 2,300 crore looks small in comparison to the enormous size of the total equity investment but that would be false comfort. The international number has been falling in absolute size also! Back in February 2014, Indian fund investors' international exposure hit a peak of 2.1 per cent. At that point, international funds were Rs 3,667 crore out of the industry equity total of Rs 1.71 lakh crore. That was actually quite a decent size for what is not intended to be a mainstream category anyway. After that, it has been downhill all the way, both in the actual amount of money and the percentage of total equity investments.
Looking at this, the normal thing to say would be that they have been rejected by Indian mutual fund investors. If that were the case, I would say that maybe there is no point to these funds. However, I feel that this is not the case. In reality, a vast majority of Indian mutual fund investors have never considered the option, never heard of international funds, and never carefully thought through the logic and the arguments for why they should put some part of their money into international funds.
Part of the reason has been that the fund companies have not sold these funds intensively, but that's a chicken-or-egg situation. A commercial organisation that has many products sells what people buy.
Meanwhile, at Value Research we have decided to tilt at windmills once again and ask our readers to consider the case for international funds one more time. However, the reason is not just that we arbitrarily felt like talking about these funds once more. Historically, the biggest argument against international funds was the taxation. Returns from equity funds in India were zero tax but this exemption was available only to funds that invest in domestic equity. Returns from international equity funds were, at best, subject to 20 per cent tax after indexation.
This gap has now closed. Domestic equity-fund returns are now taxable at 10 per cent without indexation. Practically speaking, that means that their tax advantage is no longer as much attractive. In fact, there will be many situations where you may pay less effective tax on foreign equity. This opens up the field once again by removing the big red tax warning light that investors always saw on international funds.
So go ahead and read our cover story carefully and reconsider diversifying some of your investments into international funds. Over and apart from the tax issue, there are many other arguments for them and we have had a detailed discussion on all. I'm sure you will decide to add this hitherto missing type of diversification to you portfolio.