Give your portfolio the global advantage

A weak rupee and strong global markets make a case for investing in foreign funds, but themes have to be chosen carefully

Investors in the Indian stock market would not be happy. After rising consistently in January and February, the Bombay Stock Exchange Sensitive Index or Sensex, is witnessing weakness. In comparison, global markets have been doing well. For instance, in the past six months, the Dow Jones and FTSE are up 20 and 16 per cent, respectively.

Nor is the rupee giving much relief. After recovering from 53 to a dollar, it is back at 51.3, down three per cent in a month. However, both factors imply returns from foreign markets would be much better for existing Indian investors. No wonder, financial advisors are happy to advise international funds to investors. According to data from Value Research, the international fund category has been the best performer in equities in the past year, after defensive sectors, such as pharmaceuticals and fast moving consumer goods (FMCG).

But everyone has their own favourite. Rajesh Saluja, managing director, ASK Investment Advisors, says they’re now strongly advocating the agriculture theme. “There are not many options available in this space at the moment in India. This is a very strong theme for those interested in the long run,” he says.

NUMBER GAME
Simple return (%)	5 years	3 years	1 year	6 mths
Sensex	29.93	70.47	-9.37	6.24
Nifty	35.72	68.20	-8.31	7.21
Dow Jones	6.20	67.10	8.36	19.90
Nasdaq Comp	27.16	96.76	13.84	24.07
FTSE 100 INDEX	-6.19	50.38	0.03	15.98
Shanghai SE COM	-24.73	-0.47	-21.06	-1.78
S&P GSCI Agric Indx Spot	68.34	52.75	-16.64	-1.22
S&P Global Agribusiness	—

74.00 -4.59

15.72 Equity

Source: Bloomberg                                       Data compiled by BS Research Bureau

The numbers support his views. In the past year, the S&P Global Agribusiness Index has gone up a little over 15 per cent. Investors in India have options such as Birla Sun Life’s Global Agri Fund, the DWS Global Offshore Agribusiness Fund and DSP BlackRock’s World Agri Fund.

Then, there are country-specific funds. China funds seem to be attracting financial experts. Prateek Pant, head of wealth solutions, RBS Private Wealth, explains China is on the verge of a second round of growth and there has already been a fair amount of investments from foreign institutional investors flowing in to China. “The exposure to rupee-dollar fluctuation is much less, as these stocks are listed either in Hong Kong or in Shanghai,” he adds.

Fund managers say investing in these funds help balance the portfolio. However, evaluate your options. Besides agri and China, there are options. These include funds that invest in companies that deal with gold, mining companies, energy and in markets, such as Brazil, China and other emerging ones.

However, investors should remember that taking currency fluctuation into consideration while buying an international theme is not the smartest idea. That is because a weak rupee would mean lower units of the international fund. New investors stand to lose. “With the rupee depreciating against the dollar, the returns one generates from these funds will get eroded to that extent,” says Pant.

On the other hand, existing investors in foreign funds would benefit from a strong dollar, but only if they redeem now. No wonder, even fund managers look at such schemes as only portfolio diversifiers for Indian investors, because of both country and currency risks.

As the returns are taxed like debt funds, investors stand to lose the advantage given to equity schemes. One does not have to pay long-term capital gains tax if you stay invested for more than a year in schemes with over 65 per cent allocation to equities.

In the case of debt funds, the long-term capital gains tax is calculated at 10 per cent with indexation and 20 per cent without. In the short term, capital gains will be added to your income and taxed, according to the applicable slab.

For retail investors, the advice is to limit investment to between five and 10 per cent. Even sophisticated investors should not exceed 15-20 per cent exposure.