Go global, but...

Commodity funds have given the maximum returns

Gagan Puri is keen on investing in global funds. Reason: These delivered better returns than Indian equities during the last year. However, not everyone shares Puri’s enthusiasm for these funds.

According to Hemant Rustagi, CEO, Wiseinvest Advisors, investors such as Puri need to look beyond the numbers.

 

HOW THEY PERFORMED
	Returns (%)*
	3-month	6-month	1-year	2-year
Equity diversified funds	-6.27	-7.51	8.26	40.03
BSE Sensex	-5.31	-5.01	9.77	40.05
International funds	1.15	10.96	17.31	28.73
*Returns as on April 1, 2011

 

COMMODITY FUNDS
Scheme name	6 months	1 year
DSPBR World Energy- Reg (G)	29.49	26.18
Fidelity Global Real Assets Fund	18.54	22.1
Birla SL CEF- GlobalMulti Commo- Ret (G)	17.33	19.6
DSPBR World Mining- Reg (G)	15.35	19.27
fundsupermart compilations                                                                  Figures in %

As a category, average returns from global funds were 17.31 per cent during the last year. It is higher than the 9.77 per cent returns given by the BSE benchmark Sensex or the 8.26 per cent delivered by diversified Indian equity funds.

Rustagi’s contention, however, is that most investors end up making random investments in global funds, based on short-term returns. The returns will differ depending on the period one is looking at, he adds. Besides, while doing this, most investors overlook the fact that only funds investing in commodities have done well.

“The idea of investing globally is to diversify one’s risks. If an individual has to limit hisher investments to just one category, how is the purpose served,” he asks.

Commodity run
According to fundsupermart, top five commodity funds have posted returns of an average of 18 per cent in the last six months.

Commodity funds have been doing well on the back of high inflation that has been plaguing world economies. “The rise in crude oil and gold prices have made commodity-focused global funds outperform their peers, since global stocks provide leverage to rising commodity prices,” says Rajesh Krishnamoorthy, managing director, fundsupermart.

So, have global fund choices become restrictive to commodity funds only? Gopal Agrawal, head-equity, Mirae Asset Global Investments (India), believes some regional funds have also done well during the same period. He says, “Even in the commodity-driven market such as Russia and Brazil, banks and retail sectors have performed better than commodity stocks in the market rally.”

In the last six months, while Indian funds have generated negative returns, Mirae’s China fund generated 5.3 per cent returns.

Remain invested
Fund managers advise investing 10 per cent of one’s portfolio as a strategy for diversification. The figure could be higher for sophisticated investors who can keep a watch on the movements that impact the funds. However, investing in these funds will also have a foreign exchange risk.

Global funds are recommended for investors who plan to remain invested for a longer term of at least three years. Staying for a short term would also impact the returns significantly, if heshe belongs to the highest tax bracket.

Taxation
These funds are treated as debt funds and are not subject to the Securities Transaction Tax. Short-term capital gains tax is charged if one is invested for less than a year, according to the investor’s tax slab.

Similarly, for over a year, long-term capital gains tax of 10 per cent without indexation or 20 per cent post indexation is charged.

In case of global funds that invest up to 65 per cent in the Indian domestic equity markets, the tax treatment is the same as domestic funds, and investors are eligible for the tax exemption on long-term gains from these funds.