The Hindu Business Line : Diversification across 4 Cs

Mutual fund investments have always been about diversification. Indeed its core will always be diversification which is why the purists were appalled when regulators in India allowed sector-specific mutual fund schemes that appeared to be going against the grain of mutual fund investments.

The argument in its favour was and still is that the basic credo of diversification remains intact even with such funds given the fact that diversification is accomplished across the sector. Purists of course would be comforted only when a scheme is truly balanced, investing as much in equity as it does in debt and as much in growth as in dividends. The new kid on the block these days is global funds with the potential to carry this credo forward more fully.

When Indian residents were a couple of years ago allowed to invest in rupees in Indian global funds, the government achieved two things at once — progress in the direction of calibrated capital account convertibility and allowing Indian residents the scope to achieve diversification more fully, which is possible if only they look beyond India and the Indian rupee (INR).

Indeed global funds have been lapped up with alacrity, especially by the high net worth individuals (HNI). And these funds have not disappointed them — Indian global funds have been outperforming the funds that invest in the Indian bourses alone. This strategic shift makes sense, especially at a time when the Indian stock market is witnessing a decline, though marked by occasional corrections in the reverse direction.

The upside

Apart from the advantage of diversification across countries, global funds give one the direct advantage of diversifying country risks and the vicarious advantage of investing in a range of currencies.

While the Indian global funds are at present enamoured of Latin America in view of its relative ability to rein in inflation besides giving impressive gains, in due course of time the Scandinavian countries could well beckon them by virtue of their tranquillity and fair business practices.

Foreign institutional investors (FIIs) lend themselves to the drawing of the most apt analogy in this regard. They came in droves to India lured by the promise of fantastic returns on investments when the market was going through the roof for a long spell, but have been quick to scale down their presence when the market started tanking.

Indian global funds indeed can take a cue or two from FIIs. Global funds need not invest in equities alone. Commodity funds too have become common what with commodity prices relentlessly going up the world over. In fact, a heady mix of gold, oil, copper, bauxite and what have you could be just what the doctor has ordered. Commodities have a longer cycle unlike equity and, hence, the current boom in commodity prices most likely is not going to prove evanescent.

The downside

Figuring prominently on the flipside is the currency risk. The Indian investor might have paid the mutual fund in rupees but that does not mean he hasn’t taken any currency risks because the mutual fund after all is going to convert the rupees thus mobilised into, say, the Brazilian real or the Mexican peso if you will according as which country it is enamoured of.

And this introduces an element of risk that may not be foreseen by the Indian investor. The Indian global fund after all does not take the exchange losses in its stride. In fact what is won in the swings (the bourses) could be lost in the roundabouts (the currency market) or vice-versa.

But then it is equally possible that fortune favours him in both the markets. The point is currency risk is too real to be ignored. The other disadvantage is the distance factor.

A fund manager sitting in India possibly cannot have his ear to the ground when he invests in Latin America unless, of course, he simply plugs into a mother fund in that region which is but an example of fund of funds or creates a mirror fund that replicates the scheme belonging to the same fund house operating in that region. Whatever be the mode of presence, nimble footedness a la FIIs is a must — exit at the whiff of trouble and enter when times are propitious.

On balance, global funds right now are for the HNI category that has capacity and appetite for heightened global risks. Lesser mortals may have to bide their time till perhaps omnibus, omniscient and omnipresent global funds strutting across countries, continents and commodities start straddling the world, thus ushering in diversification on every possible front and touchstone — countries, continents, commodities and currencies.

(The author is a Delhi-based chartered accountant.)

More Stories on : Mutual Funds | Investments | Accountancy | Contra Entry

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
The logic of hybrid vehicles

Diversification across 4 Cs

Regulator’s neutrality a must to ensure level field

Accountability of independent directors