After European and US stock markets caught the investor’s eye, it is now the turn of the Japanese market. Reliance Mutual is looking to jump into the bandwagon and participate in the rally, with its new fund offer of Reliance Japan Equity fund. The open-ended scheme will put at least 80 per cent of its portfolio directly into Japanese equities. With no fund dedicated exclusively to the Japanese market, Reliance Japan Equity is quite unique.

Where it will invest

The fund is benchmarked to the Topix, or the Tokyo Stock Price index, of the Tokyo Stock Exchange (TSE). Along with the Nikkei, the Topix is the most important index in the exchange. The Topix is made up of a pool of the largest companies in that country.

The top sector in the Topix is transportation equipment, followed by electrical appliances, banking, communication and chemicals rounding out the top five. The top-weighted stock in the index is Toyota Motor Corp.

The Reliance Japan fund will look for stocks which are market leaders or have the potential to be the leaders.

But with over 1,770 stocks making up the Topix, the fund has a large pool of stocks to choose from. The Topix also represents over 90 per cent of the Japanese market cap, making it quite a representative index. Up to 20 per cent of its portfolio can go into Indian debt instruments too.

Dormant for many a year, the Japanese equity market gathered steam from the second half of 2012, after a programme to bolster the struggling economy was launched by Prime Minister Shinzo Abe. Changes to the labour market, a more corporate-friendly regime and steps to boost consumption and drive up inflation, all found favour.

Foreign ownership in the market picked up in response to the proposed measures, moving from 26 per cent in the 2009 to 2011 period to 30.8 per cent by end-2013 by market cap. From 2013 to date, the Topix index is up 43 per cent (in yen terms). The three-year annual return of the Topix works out to 17 per cent.

The hurdles

Reliance Japan Equity is not a fund-of-funds like most international schemes, which simply buy into established global funds. Therefore, much would depend on the fund manager’s expertise here.

Currency fluctuations also play their part. A depreciating rupee will boost returns. In the past few years, the rupee went on a rollercoaster ride. It depreciated against the yen for some time in 2012, pulled back from mid-2012 to mid-2013.

The rupee has begun weakening against the yen in the past few months again. For instance, the one-year Topix return of 11.2 per cent drops to 4.9 per cent in rupee terms.

Finally, since this is an international fund, short-term capital gains will apply on holding periods of less than 36 months at the applicable slab rate. Long-term capital gains will be taxed on holding periods over 36 months at 20 per cent with indexation benefits. Jahnvee Shah will manage the fund. The fund closes on August 20. It will reopen for subscription from September 3.

comment COMMENT NOW