Funds with focus on overseas equities outperform

International mutual funds offered by the desi fund houses have turned out to be the best performers in the past one year, taking seven of the top ten performers' slot among open-ended funds, according to data available with www.mutualfundsindia.com , part of the credit rating agency ICRA Ltd.

This has come at a time when most of the domestic funds have dished out poor returns, despite the rally the markets have witnessed since January.

While the primary reason for this performance gap appears to be the sharp decline in the value of the Indian rupee against the greenback boosting returns of international funds, a host of other factors have contributed to this development - the perceived policy inertia on the part of the Central Government, the lacklustre performance of many frontline companies particularly in the infrastructure space, the political divisions over key policy issues like FDI in retail, insurance etc that is making foreign investors reluctant in taking the plunge.

A look at the returns given by some of the foreign offerings of Indian mutual funds could give an idea of their sterling show. The Motilal Oswal MOSt Shares Nasdaq 100 ETF, had, as on August 24, given a whopping 56.03 per cent return in 12 months to top the list. This was followed by ING Global Real Estate Fund - Growth which has given a 35.94 return, Birla Sun Life International Equity Fund - Plan A – Growth that has provided 32.94 return, JPMorgan JF Asean Equity Offshore Fund which gave 30.72 return in the past twelve months. In fact, it was only  ICICI Prudential Technology Fund - Growth, which gave a return of 30.43 per cent that broke the dominance of international funds in the rank list.

Two other domestic funds figured later in the list of top 10 that is dominated by international funds.

However, the key question is whether the investors could enter these funds at the current levels when they have run up quite a bit in the past one year. As hopes over the government biting the reform bullet are strong and rupee weakness may have run its course, it may be possible that the revival of the Indian markets is round the corner. The continued uncertainty in the Euro zone and delay in the revival of the US economy also pose questions as to how long the buoyancy in the international markets could continue.

Mr C.J. George, Managing Director, Geojit BNP Paribas Financial Services Ltd, Kochi, responding to questions from Business Line on the reasons for the international offerings of Indian mutual funds putting up a good show, said  some of the key international markets where these funds had invested “performed better than the domestic market”.

The depreciating rupee only boosted further the returns these funds delivered. In fact, a majority of international funds have beaten the domestic funds in their returns. Further global funds that focused on, apart from equity, other investments like real estate, agri–commodities, or with a regional diversification (focusing on specific markets), have “delivered thumping returns as well”.

On whether the substantial returns in the past one year were more due to rupee depreciation, he said while the weakness of INR had “positively influenced the performance” of the international funds, this alone “should not be the sole criteria” for investing in an international fund.

Replying to a question as to whether the high returns by commodity related international funds-mainly gold - not only over a year but over 3- and 5-year period would continue, he said the yield offered by commodity based international funds have generally been good, particularly the one focused on agri-commodities.

The returns from domestic Gold ETFs have been positive across, one-, three- and five-year horizon. Both domestic and international Gold ETFs had witnessed

fresh inflow of assets in July 2012 as compared to previous months. But the returns from international funds investing in gold mining stocks were negative over the last 6 months and one year time period. However, he believed that because of the "turbulent global economic scenario and inclination towards safer assets”, gold as an asset class should hold good in the long term.

Unlike gold, the price of agri commodities like corn has skyrocketed because of drought in the US, as well as due to its use as an ingredient for alternative fuels. But its price would ease out eventually though such a possibility look distant in the short-term.

Mr George, asked whether the international funds have peaked or was it risky for investors to enter them at present levels, said some of the major international indices were at yearly highs. But a majority of these international funds are `actively managed and active fund management holds key as far as the performance of the funds is concerned”. He felt that the risks arising out of exchange rate fluctuations “should not be a constraint” for investing in them.

On whether he expected the Indian MF schemes to give better returns that their foreign peers going forward, he said since the valuations were attractive at current levels, “Indians markets are expected to deliver better returns in the long run”. International funds offered geographical diversification in the investors' portfolio and the extent of such holdings “depends on the risk profile of the investor”, he said.

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