Overseas distributors prefer selling offshore funds

The entry load ban on mutual fund investments by the SEBI has turned away not only mutual fund distributors in India, but those overseas as well.

As a consequence of this, more of the offshore, India-focussed mutual funds — including those belonging to Indian mutual fund houses — are being sold by distributors, said the head of a large brokerage which has joint venture distribution operations in West Asia.

“We have stopped selling rupee-denominated Indian mutual funds in Dubai,” he said. “Instead we are selling foreign currency denominated India-focussed mutual funds.”

While the Indian mutual funds fetch commissions of less than 0.5 per cent for the distributor, the foreign currency denominated offshore funds fetch as much as 2.5 per cent, he said.

The SEBI diktat on entry load does not apply to offshore mutual funds floated by Indian AMCs. These are denominated in dollar, UK pound or other foreign currency.

For an offshore fund, an Indian AMC typically creates an overseas subsidiary that is domiciled in Mauritius, Cayman Islands, Singapore or Luxembourg. This outfit gets an FII licence from SEBI to invest in India. Technically these AMCs are regulated by the relevant authority of the country in which they are domiciled, and are not bound by SEBI regulations.

Offshore fund portfolios from Indian AMCs often mirror some of their Indian mutual fund portfolios from the same fund house. They offer almost exactly the same investment pattern, said a mutual fund distributor. Apart from the offshore funds floated by Indian outfits — either by themselves or with joint venture partners — there are offshore funds floated by international fund houses.

Research firm Morningstar India lists 488 India-focussed offshore funds.

Many of mutual fund houses in India, including Reliance MF, Tata MF and Kotak in India, have offshore funds.

Mr Jaideep Bhattacharya, Chief Marketing Officer at UTI Mutual Fund, said that his fund house offers the same distribution structure to both Indian and overseas distributors. Dollar denominated offshore funds are structurally different and the commissions or advisory fees charged have always been different, he said. Otherwise, both the domestic and offshore funds from UTI are seeing good offtake, especially after the Gulf crisis, Mr Bhattacharya said.

At SBI Mutual Fund, there are currently not much of investments coming into either Indian mutual funds or offshore mutual funds, said Mr Srinivas Jain, Chief Marketing Officer. Of course the ban on entry load applies only to Indian mutual funds and the commissions on offshore mutual funds are very good, he said. “Though the market is not so active, our well-performing funds always receive inflows.” According to him, “ultimately people go by performance.”

Performance wise, offshore India focussed equity funds, including those floated by international fund houses, gave an average return of negative 1.75 per cent (in dollar terms) during the second quarter of 2011, according to a report by Morningstar Offshore India Fund Spy (June quarter-end edition of the Morningstar global database).

A fiscal quarter is too small a period to judge mutual funds, say many industry professionals. Returns annualised for the past three years are also available from Morningstar India for offshore India focussed funds. To take a few examples, the annualised three-year return is 8.82 per cent for Tata Indian Opps Japan, which is a dollar denominated fund.

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