Risks in global mutual funds

Mutual Funds | admin | March 20, 2011 at 9:27 am

Diversification may be an oft-heard, hackneyed chant, but it can work wonders for returns from your stock investments. In the past one year, the Sensex has risen by less than 7%, and the domestic diversified equity funds have earned an average return of just over 2%. On the other hand, investors in global funds, which diversify their investments in overseas markets, have earned close to 19% average returns during the same period.

While most developed markets have been on a roll in the past year, the correction in the Indian markets has pulled down the returns of domestic-oriented schemes. "Developed countries are following a different economic cycle. While the recovery in India is peaking, the developed world has just entered the recovery phase," says Devendra Nevgi, principal partner, Delta Global Partners. The foreign investors, who had flocked to India and other emerging economies in 2010, have started packing up.

Global funds are schemes that invest at least 65% of their corpus in foreign stocks or overseas mutual funds. A total of 24 global funds have been launched since foreign investment norms were eased in 2007. These funds invest in various markets, allowing investors to gain from the rise in other emerging and developed markets.

global mutual funds

Another advantage of going global is that the investor gets to buy a wider range of assets through his fund portfolio. For instance, silver ETFs and real estate investment trusts are common in developed markets. "Global funds give you access to asset classes that are not even available in India," says Nevgi.

However, most global funds in India are thematic funds that focus on a particular sector or commodity. For instance, the rise in crude oil prices in the past six months has pushed up the returns of the DSP BlackRock World Energy Fund. The rally in gold prices has made AIG World Gold Fund the best performer in the past one year with 35.7% returns.

"Most global funds have performed better than the domestic funds mainly due to the rally in global commodity prices," says Dhirendra Kumar, CEO of Value Research. Before you invest in global funds, keep in mind that the risks involved in overseas investments are far more complex than those in domestic markets. These include the country-specific risk, policy risk, as well as the exchange rate risk.

Some experts also believe that global funds do not truly diversify one's portfolio. "These are niche funds and, hence, the edge of true geographical diversification is missing," says Kumar. Besides, to exploit the diversification benefit, the choice of funds makes a bigger difference. "The global funds that are highly focused on emerging economies tend to mitigate the diversification edge as they usually have a high correlation with India," points out Sandip Sabharwal, CEO, Portfolio Management Services, Prabhudas Lilladher.

Source: Economic Times