Rise of rupee adds to global funds' woes

The rise of the rupee against the dollar has turned out to be a damper for global funds operated by mutual funds here. Although these funds have got minimal investor interest, the escalating rupee has made things worse for them.

Recently, Franklin Templeton had to wind up its Franklin International Fund. “The reason for the decision is strengthening of the rupee against the US dollar, which has resulted in a sharp reduction in demand,” said a Franklin Templeton statement.

The fund invested in US government bonds. With returns on these being already low (less than two per cent), the rising rupee made returns negative. Equity funds have not been spared either. Returns of most international funds are below their benchmarks. Experts say for every one per cent appreciation in the rupee, returns go down by 3 per cent.

The rupee is currently trading at 44.40 against the dollar. It has strengthened 4.5 per cent this year, the second-best performance among Asian currencies, after Malaysia’s ringgit. Currency experts say the trend is here to stay in view of increasing foreign inflows. Overseas investors have bought a net Rs 29,220 crore of Indian equities this year, after a record Rs 83,420 crore in 2009.

“These funds did not have much appetite earlier also. Their assets under management have been going down. In March, global funds were among the worst-performing ones because of the rupee’s rise. Although the number of funds has gone up, their assets are quite insignificant. Rupee appreciation will continue to have an impact on their returns,” said Dhruva Chatterji, research manager at iFast Financial.

For example, the one-year return for Birla Sun Life’s international equity fund is 18.03 per cent, while the category has posted 48.49 per cent returns, according to Valueresearch Online. Similarly, the DWS Global thematic fund has returned 23.91 per cent in one year, as compared to 48.49 per cent returns given by a similar category of funds. Mirae Asset’s China Advantage Fund has posted 1.48 per cent returns. The category returns are 5.94 per cent. “If you look at absolute returns, India has done better. However, Indian equities are more volatile. So, in terms of risk-adjusted returns, both would have given similar returns.

It depends on the asset class also, as to whether the fund is more exposed to emerging markets or global markets. But, as returns from Indian markets normalise and there is more awareness about these products, investors will come,” said Arvind Bansal, vice-president & head, multi-manager investments, ING Mutual Fund.

There are 28 international funds in India. However, there may not be many new fund offerings with global themes, because of a recent move by the Securities and Exchange Board of India (Sebi) to clamp down on fee-sharing arrangements of these funds. Sebi has barred Indian fund of funds from management fees on investments by the feeder fund.