Is the time ripe for Indians to invest globally? What are the most attractive options for Indians to build a more global portfolio?

The global financial markets saw a series of events in the last two years with the abruption of subprime crisis followed by fall of investment banking behemoth Lehman Brothers in US. The whole process disrupted the world financial markets including India too, thus, giving a silent killing to the concept of ‘Decoupling’. The central banks in mutual relationship with their central governments declared a series of relief programs/packages. The combined global measures along with increased consumer consumption improved the global sentiments and markets performed comparatively better in 2009 YTD. India emerged as the 2nd best performer with a return of 73 per cent – its third best domestic performance in a year in its history-- in YTD 2009 followed by Brazil, Thailand, Taiwan, China etc. Russia remained at the top slot with an overall return of 90-plus per cent in YTD 2009. Nevertheless, other developed markets such as Japan’s index, S&P 500 etc gave returns in the range of 20 per cent.

Table 1- Performance of MSCI Indices
Indices YTD 1 Yr
MSCI EM Asia 59.88% 92.20%
MSCI BRIC 76.02% 105.63%
MSCI Europe 26.53% 39.73%
MSCI The World Index 20.51% 24.30%
MSCI G7 Index 17.36% 19.33%

A look on table 1 depicts a very clear picture that emerging markets have outperformed the world index and Europe and G7 index by a huge margin. The world index has given return of 20.51 per cent in YTD 2009 as compared to MSCI BRIC which gave 76.02%in YTD 2009. In terms of valuations, India is trading at 15x PE FY2011, near to its historical average of 14.2x while China and Hongkong is trading at 17.3x and 14.5x FY 2011. US’s S&P 500 is trading at 14.5x PE while Russia and Korea is trading in single digits. So, in terms of valuations, India has reached a stage comparable to world markets but the opportunities are endless in India in terms of returns.
The developed markets are still to experience a handsome improvement in various economic parameters. The treasury rates are still quoting at their all time lows prompting the global investors to invest in emerging markets like India. So, logically at this point, the time is not ripe for Indians to invest in global markets as the domestic market provides a better opportunity in terms of valuations and earnings.
Let us understand the need of global portfolio: Investors, by and large, build global portfolio primarily because of diversification opportunities they offer. However, global funds are subject to currency risk and country risk. The retail investors in India are still not financially educated to build a global portfolio on their own- the reason being the small tick size and lack of known avenues. The investors are still inclined towards bank deposits and other traditional investment products. In India, mutual funds have travelled a long path in building AUMs, currently hovering at Rs 7.5 trillion crore where global dedicated funds’ share stands at Rs 7.5 k crore as on Sept 2009 despite being allowed an exposure limit of $ 7 billion for overseas investments by Indian mutual funds.

Table 2- Performance of Global Funds (India)
_____________________ 1 Yr 3 Yr
Frankling Asia Equity Fund 60.79% 9.82%
Tata Growing Eco Infra Fund 83.28% -
ICICI Pru Indo Asia Equity Fund 89.19% -
Fidelity International Opportunites 71.63% -
Principal Global Opportunities Fund 68.75% 4.69%

The table 2 depicts the performance of global mutual funds operating out of India. Most of the funds are dedicated to Asia and emerging economies. They have given returns in the range of 60.79% to 89.19% in one-year category, much lesser than the diversified fund category of around 100 plus per cent. Some of the funds invest in global assets directly while others invest in overseas mutual funds, also known as feeder funds such as DSP BR World Energy Fund, Franklin India International Fund etc. In the current market rally, the domestic diversified funds have performed better than the global funds and there have been no clear trend for performance in global funds. However, the mutual fund route seems to be right option to build a global portfolio rightly through India’s dedicated global funds and foreign-based funds. Investors need to take into account of the volatile currency risk and country risk. In the near term, dollar has reached to its 14 month low value against Rupee. So, the concept of dollar carry trade is widely practiced in the investment circles. Global investors take the PN (participatory notes) and PE (private equity) route to invest in India while Indians mainly high-worth investors follow the PE and buy-out route. Some of the well defined ways to diversify internationally and build global portfolios are given below:
1. Index investments- If investors hope are a return close to average market return; it is advisable to go for passive funds such as ETFs.
2. Invest in global funds with low expenses.
3. Go for offshore funds as they offer tax advantages over onshore funds on profit accumulated.
4. Avoid funds with frequent turnover i.e. with high turnover ratio.
5. One can also invest in international shares directly. During the economic downturn, some of well known stocks such as Citi, JP Morgan, AIG etc were trading at excellent valuations.