The Advantages and Disadvantages of Global Funds!
The global funds can be classified in different categories. One category takes care of a particular country or region-related investments like USA, Europe, Asia or China. The second category will allow investment in any country. The third one relates to one particular theme.
In our daily routines covering purchase of goods and utilising the services of various kinds, we do necessarily depend on different foreign companies and institutions. To cite a few, the Windows operating system that we use in computers, search engine of Google, G-mail service, Apple I-phone in cell phones, Amazon for on-line shopping facility and social media such as Facebook, Twitter etc. rule the roost. At the same time, we are not serious about investing in the stocks of these companies and foreign mutual funds and benefit from it.
Why should we invest?
When the economic growth in India is sound, the foreign investors have no hesitation to indulge in investing in Indian companies through FII route(Foreign Institutional Investments). This helps them earn sizeable profits. One can think and question as to why we should invest in foreign companies when the Indian economy continues to be promising. The answer lies on the positive side of investing and earning profits when the trend is favourable. As an evidence, we can quote the example of United States in 2008-2009 period when the American economy collapsed and the stocks tumbled to all time low. At that time, other countries started investing in India thereby reaping good returns. Over a period of time, America started picking up and in a couple of years or so, the American companies started rising up gradually and all other nations have automatically switched over to investing in American companies as well and the US stocks have risen considerably..
Therefore, it is imperative on the part of Indian investors to realize the fact that we must come forward to invest in foreign companies in order to avail of the benefit thereon.
Why Mutual Funds?
We are not in a position to update ourselves with the latest happenings of the companies and the economies for us to invest directly in stocks which is why we need to invest in the foreign companies through mutual fund mode. Moreover, the skill sets that are required to operate the foreign stocks directly are comparatively less on our part.
Foreign MFs Operating from India
Basically, there are three types of MFs under global category. Under the first one, the Funds will directly invest in foriegn stocks or the index like Nasdaq. Under the second category, the Funds will invest in the existing Funds abroad and hence this is called Fund of Funds. Under the third one, only a part of the Funds will be invested in foreign companies.
Top Global Funds’ Revenue (%)
Fund Name 5 Years Return(%)
Motilal Oswal Nasdaq 100 ETF 21.84
Franklin India Feeder US Fund 15.14
ICICI Blue chip Equity 13.63
DSP Blackrock US Flexible Fund 13.39
Edelweiss Greater China Fund 13.09
Further, the global funds can be classified in different categories. One category takes care of a particular country or region-related investments like USA, Europe, Asia or China. The second category will allow investment in any country. The third one relates to one particular theme. Some of the examples of this type are commodites, mines & minerals and agriculture.
The above table is self-explanatory and it shows which global funds have contributed more in the last five years. Moreover, it is a clear indication that the majority of the above global funds are related to American companies.
Another observation that can be made is that America’s economic growth has been steadily growing and that the stocks have been fetching better returns to the investors.
Tax structure of global funds returns
Even if we invest in global funds operating from India, they are treated on a par with debt fund tax structure, i.e. if we keep the funds for more than three years, the long term gain tax is 20.6% after the indexation benefit. If the investment period is less than three years, the tax structure will be as per their income tax slabs.
Benefits of global funds
In order to widen the base, it is better for us to invest a part of our money in certain global funds after our regular investments in Indian companies. The chief benefit is that whenever, the growth of our economy is affected it will be offset by our investments in global funds as their growth might be steady or progressing.
If we look at the global scenario in relation to India’s fast growth rate, the American influence has been quite encouraging and the global funds have benefited us a lot.
Disadvantages of global funds
Of all the risks, the risks that are directly concerned with the stock market will be a great disadvantage as we may not be in a position to understand the nuances with utmost perfection.
For example, the status of American funds is dependent upon the changes that happen on the political front, economic trend, societal changes, changes in the rate of interest and the actual performance of the companies. It is difficult to have intricate knowledge of these factors. In addition to these, the changes that occur in the value of their currency from time to time will cause a severe impact on the global funds operation.
To conclude, India is ever poised for rapid growth and the stock market operations are bound to flourish more and more in the years to come. It will undoubtedly be wise for the Indian investors to set apart a sum meant for investment in global funds based on proper financial advise.
(This article written in Tamil by V Gopalakrishnan for Naanayam Vikatan magazine dt 29/7/18 has been reproduced in English by P.S.Ramamurthy)