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Finally Stepping Overseas

Principal Global Opportunities, India's first fund, which invests in overseas equity has finally been launched. Now that the scheme is finally open for subscription, lets consider the pluses and minuses of the scheme.

The biggest plus point for the scheme is that it gives you a chance to diversify your portfolio across different countries. For most of us, all our investments are in India. We are thus very susceptible to India specific event risk. Imagine what would happen to an equity portfolio in the event of a major terrorist attack, or a dramatic reversal of FII investments. Or it could be more 'mundane matters' such as a slowdown in the Indian economy. Thus this fund is one more step in the ladder of diversification. Just as investments are diversified across asset classes (equity and debt) and within these asset classes in terms of sectors and specific companies, this fund promotes diversification across geographies.

Another plus for the scheme is that as it is denominated in Rupees it gives you virtually unlimited exposure to foreign stocks. Thus the US dollars 25,000 that the RBI has allowed individuals to invest abroad remains untouched. Thus the overall amount, which can be invested abroad increases.

But there are some limitations to the scheme also. Firstly as a result of the Sebi rule which requires that investments will only be allowed in foreign companies which are listed and have a ten per cent holding in a listed Indian company the potential universe is restricted. Specifically there are no companies in the technology and finance sector for the fund to invest in. As a result of this the fund will more concentrated in other sectors and Rajat Jain, Chief Investment Officer of the AMC admits that "its not perfect diversification".

Also the scheme will not be able to grow beyond a certain limit, which is linked to the AMCs size as on January 31, 2003. Thus according to Sebi regulations the maximum permitted size of the scheme is Rs 193.9 crore. In case of over subscription allotment will be made on a proportionate basis subject to the limit for scheme size. All applicants applying upto 1,000 units shall be given full allotment, subject to over subscription upto the maximum amount.

As the scheme will invest other currencies, exchange rate risk will also be there. However, as the scheme is diversified across geographies this risk should also be reduced. As the investments will be in different time zones the NAV will be obtained on a T+1 basis i.e., a day late. Service standards are also expected to fall to T+2 for account statements and T+5 for dispatch of redemeption proceeds.

But these should be viewed as a minor inconvenience when you can for the first time own a diversified portfolio of foreign equities.

Fund Details
IPO 23 February to 19 March, 2004
Investment Options Growth & dividend
Minimum Investment 
During IPO Rs 10,000
Thereafter Rs 25,000
Initial Issue Expenses Upto 6 per cent to be borne by investors
Entry Load 2 per cent
Exit Load 1.5 per cent for redemptions within 6 moths for IPO investors
Benchmark  MSCI World Index