America in your portfolio, but only a bit

With the US economy beginning to improve, fund houses are looking to tap the potential of its stock markets. Franklin Templeton India's new fund offering (NFO) — FT India Feeder US Opportunities Fund — is an open-ended feeder fund that will invest in Luxembourg's Franklin US Opportunities Fund. This fund is targeting investors looking to diversify portfolios in foreign markets. The parent fund invests in US-based companies across sectors.

The timing of the launch is quite correct, as US markets, in the past one year, have performed better than Indian ones. The Dow Jones index gained 5.5 per cent in the last one year and the Nasdaq was up 2.2 per cent. In comparison, the Bombay Stock Exchange's Sensitive Index or Sensex lost 7.76 per cent year-on-year.

However, over the long run, US markets have not outperformed India. In the last three and five years, the Sensex has returned, respectively, 24.16 and 3.83 per cent, annually. In comparison, Nasdaq has returned 23.24 and 2.95 per cent and the Dow Jones index 15.28 per cent and 0.28 per cent, respectively, in the same periods.
 

COMPARING PROFITS Returns from FT US Opportunities Fund vis-à-vis broader indices                     (%)
Index/Scheme	6-month	1-year	3-year	5-year
Sensex	-6.50	-7.76	24.16	3.83
Nifty	-6.17	-7.13	23.38	4.64
Franklin Templeton US Opportunities Fund  (parent fund)	NA	15.08	22.45	7.56
MOSL Nasdaq ETF	15.14	NA	NA	NA
Nasdaq	2.10	2.22	23.24	2.95
Dow Jones	4.20	5.59	15.59	0.28
Source: ValueResearch, BS Research Bureau

This is the second international feeder fund investing in the US. Motilal Oswal AMC launched a Nasdaq exchange-traded fund (ETF) last year. It has returned 15.14 per cent in the last six months. The Franklin US Opportunities Fund has returned 15.08 per cent in the past year.

"The fund helps achieve diversification through exposure to high quality US companies trading at attractive valuations. Adding an international fund to the portfolio can help reduce the potential risk over the medium- to long-term," says Harshendu Bindal, president, Franklin Templeton India. The fund will get listed at the stock exchanges on February 14.

Some companies this fund invests in include marquee firms like Apple Inc, MasterCard, Google and Blackrock. About 16 per cent is put in software and services sector, 14 per cent in technology hardware, 12 per cent in energy and 10 per cent in capital goods. Other sectors are pharma, food and beverages and retailing.

"This fund should not form more than five per cent of your equity portfolio," says Ashish Kehair, EVP and head, private wealth and international business, ICICI Securities. The companies comprising the fund portfolio generate more than 50 per cent of their revenues from non-US countries, making them less prone to the economic conditions in the US, he adds.

But remember, in spite of investing in equities, the tax on feeder funds is calculated like that for debt funds. Long-term capital gains tax is calculated at 10 per cent with indexation and 20 per cent without it. In the short term, capital gains will be added to your income and taxed according to slab.

Sudip Bandyopadhyay, MD and CEO, Destimoney Securities, says, "This is not a product meant for retail investors. It is for those aware of global markets like high net worth individuals. Retail investors do not understand how this works." The NFO opened on January 17 and will close on January 31.