Is the depreciating rupee making you poorer? Try feeder funds in India

Is the depreciating rupee making you poorer? Try feeder funds in India 

The falling rupee against the dollar paints a bleak picture of the economy. This fall in the value of money is attributed to many global factors. It all started with sub-prime crisis of US, followed by bankruptcy of Lehman Brothers which was followed by Eurozone crisis. 

The news from the financial world is quite confusing these days, in one month we see the markets moving higher and in the next month they fall due to some global weakness and depressing news of the economy. Tangled between the two situation, the Indian rupee has lost its sheen and is currently trading around 55-56 levels from 46-47 earlier. 

Adding woes to the investor’s sentiment, investments made into the mutual funds space has returned negatively for the past few months. 

If you believe that you can overcome the hurdles of slowing GDP rate, falling rupee and rising inflation and it won’t be a problem on your part to fulfill your child’s dream, then either you have planned your finances really well or you must be living in a dream land.

Way Around:

Is the depreciating rupee making you poorer?

If the answer to the above question is yes then you have failed to diversify your portfolio. A well diversified portfolio should always have a certain allocation to global funds which can act as a cushion when the Indian markets fall due to domestic reason.

The economy is going through a rough patch and the recent performance of the Indian market highlights the fact. In these turbulent times many international funds are doing well in other markets.

Before going any further, let us first notice the returns from few of the feeder funds. Not only these feeder funds have posted good returns but they also have helped to diversify the investor’s portfolio.

		CAGR
Scheme Name	Latest Date	1 Year	3 Years	SINCE INCEPTION
Category: Fund Of Funds
DWS Global Thematic Offshore(G)	29-Jun-2012	6.2969	9.1520	-1.8549
Fidelity Global Real Assets Fund (G)	29-Jun-2012	8.7711	N.A	15.7380
ING Global Commodities(G)	28-Jun-2012	-9.4215	8.6715	5.4105
ING Global Real Estate-Reg(G)	28-Jun-2012	21.2905	19.8393	5.7360
Kotak Global Emerging Mkt(G)	29-Jun-2012	4.6463	12.6812	1.1569
Principal Global Opportunities(G)	29-Jun-2012	5.5925	14.4897	8.3917
Sundaram Global Advt(G)	28-Jun-2012	1.7834	12.7638	4.3114
Category: Speciality
Birla SL Intl. Equity-A(G)	29-Jun-2012	11.3368	12.8844	1.9508
Fidelity International Opp(G)	29-Jun-2012	-1.0599	13.0127	5.7465
Franklin Asian Equity(G)	29-Jun-2012	6.0779	9.9184	3.8403
Tata Grow Economies Infra-A(G)	29-Jun-2012	2.1850	8.5298	4.6064
Templeton India Equity Income(G)	29-Jun-2012	-7.0000	12.2026	11.0768
Category: Benchmark
BSE SENSEX	29-Jun-2012	-7.1223	5.9793

Feeder Funds: Feeder funds invest via another fund called the master fund. If an Indian mutual fund finds suitable opportunities in US, it will tie up with a US mutual fund and will launch a feeder fund in which Indian investors can invest. The amount would be invested in the US host fund. When the US market does well, the US host fund would follow the suit which in turn will allow the Indian fund to perform better.

It's all about diversification

For most of the investors, investing in a foreign fund is totally a new concept which is somewhat unknown to them. Majority of them always prefer to stay invested in domestic asset classes and for good reason. India is always projected as a growing economy marked with an ever increasing domestic consumption growth. This reduces the investor sentiment to invest into different markets.

But the picture is not as rosy as it used to be. The GDP growth rate has fallen sharply and has come off from the highs of 9% which means that the investment will require some time before it can actually grow.

The main reason why investor should look for investing into feeder fund is to diversify the portfolio. Just like we diversify our investments amongst various different asset classes the same way we should diversify our mutual fund holdings too.

Exposure of different markets can lower down the overall portfolio expenses by providing sound returns from different markets.

Another reason why one should look investing into the feeder funds is due to the fact that different foreign markets offer different opportunities. Every country has certain strengths which is distinct to its location. For example, India enjoys certain strengths which are unique to its geography, which may not be available elsewhere. Likewise, the foreign funds will also have some unique investment opportunities that are not available with Indian funds. Few of the notable sectors where India lags are the agriculture sector, technology space and etc.

For example, US is relatively good in technology and robotics and investing into these sectors in the US can lead to huge gains.

How Falling rupee will help you to earn more

The sharp erosion in the value of rupee against the dollar has helped the NAVs of these funds to increase in rupee terms. If the rupee fall remains unabated and foreign markets tend to perform well then investing in the global funds can have a big impact on your returns. 

In the case of feeder funds, the Indian investors invest in the fund through rupees for buying the Units. The rupees are then converted into foreign currency for investing abroad. When the investor receives dividends from the funds, they receive it in foreign currencies which are then converted into rupee.

Suppose you invest in a US feeder fund, the fund declares a dividend. This dividend is declared in dollars and when they will be converted in rupee, the investors automatically will gain more because of the depreciating rupee. 

What makes these funds exciting are since the foreign currency rates always fluctuate and cannot be predicted, there is an element of risk and also an opportunity present in them.

So in current times, if an investor invests in any global fund, specifically in an US fund they will receive dividends in the form of US dollars, which when converted will give more rupees to the Indian investor.

The value of dollar has increased by more than 18% over the past ten years and more than 23% during the past year.

United States of America: A possible opportunity

US economy represents approximately 22% of the global GDP, which is a significant portion of the global economy. Separately, the US companies derive a substantial amount of revenue from outside the US.  I believe a combination of stronger housing construction activity and improved consumer spending will be sufficient to help the US economy to grow in 2012.  

US equities are currently trading at just 12.9X at a discount to 5X fair PE estimate, which is a clear signal that the US economy is bound to grow in future.

Fund Focus:

ICICI Mutual fund has recently launched a fund focusing on the world’s largest economy, i.e. the United States of America. The main feature that stands out in this fund is that the fund manager has complete control on the stock picks, unlike a fund of fund whereby the parent fund dictates the stock selection.

This fund is a large cap fund which invests in companies listed on New York Stock Exchange (NYSE) and NASDAQ. The fund house has partnered with Morningstar Equity Research Services (MERS), the latter will identify stocks on the basis of a strategy called Wide Moat;

Areas of Concern:

Just like domestic mutual funds, the global funds also carry the market risks associated with them. Also another problem is that since these funds are foreign funds any economic or socio-economic problems arising in those countries is bound to hamper the returns. Moreover, the risks are unknown in the foreign countries.

Conclusion

I have been advising investors to take an exposure into the global markets not only for diversification purpose but also to avoid concentration risks.