International feeder funds: Wrong time to go globetrotting?

India's outperformance this year takes sheen off global feeder funds

Several global economies are going through an uncertain phase. That's bad news for those who want to diversify their portfolio by putting money into international feeder funds.

Feeder fund investors need to assess two key parameters before investing. The first is the prospect of the country, region or theme the fund will invest in. The second is the stability of the currency one invests in. However, diversification into different geographies — and not currency play — should be the chief reason for investing into these funds.

Financial planners recommend setting aside 5 to 10% of one's portfolio for feeder funds. However, the case for putting money into global funds at this point remains weak. For one thing, Indian equities look much more promising than their global peers. The country's benchmark BSE Sensex has given returns of about 34% in the year to date in dollar terms, outperforming markets such as China (19%), Japan (- 4.5%), US (12%), Brazil (- 0.3%) and Germany (- 7.3%).

For another, there is a cloud of uncertainty hanging over global economies. The world's third largest economy Japan, for instance, slid into recession in the three months to September. Economies of China, Russia, Brazil and even Europe are also going through a bit of a rough patch. Japan's woes as well as sustained conflicts in West Asia and Ukraine may once again drag down parts of Europe — a popular region feeder funds invest in — back into recession.

US feeder funds, however, may be on a slightly stronger footing. The country's benchmark index S&P is poised to end the year with double digit gains and the rupee is hovering near nine-month lows against the greenback. But experts are not enthused. “There are pockets of opportunity, but valuations in S&P companies look stretched. Also, the US market is unlikely to outperform the Indian market in the near to medium term,” says Vidya Bala, head – mutual fund research, Fundsindia.com.

The rupee may not slip significantly, either. In a recent research note, Bank of America Merrill Lynch pointed out that it is confident that the RBI would hold Rs 58-62/USD with lower oil prices and gold import curbs offsetting US dollar strength. For a US-based feeder fund, investors invest in rupees, which is then converted into dollars. The dollars are re-converted into rupees during redemption.

“It is not always necessary to take the feeder fund route to play the rupee depreciation. Instead, one can invest in local shares of export-oriented IT and pharma companies to benefit from the rupee's descent,” said Bala.

Feeder funds have performed abysmally this year. One-year average category returns for International funds stood at 1.35%, with several funds giving negative returns, data put up on Value Research shows.

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