Is it right for HNIs to go gung-ho about investing in offshore funds?   Nov 13, 2013


The Indian equity markets depicted an impressive impulse in the month of October 2013 posting a gain of +9.2% on the S&P BSE Sensex. But overall in the calendar year thus far, the Indian markets have shown rampant volatility with host of domestic and global macroeconomic variables in play.

Retail investors seem nervous about investing in Indian equity markets (with their participation in the equity markets at a 10-year low), although the markets have scaled a new high in the recent past (on the Muhurat trading day). The story for High Networth Individuals (HNIs) isn't any different. They too seem less convinced about investing in India story with not having seen meaningful returns.

Performance of some major world indices
World Indices Index Level Absolute Returns
31-Dec-2012 08-Nov-2013
Dow Jones 13104.1 15761.8 20.3%
CAC 40 3641.1 4260.4 17.0%
DAX 7612.4 9078.3 19.3%
FTSE 100 5897.8 6708.4 13.7%
Nikkei 225 10395.2 14086.8 35.5%
Shanghai Composite 2269.1 2106.1 -7.2%
S&P BSE Sensex 19426.7 20666.2 6.4%
(Source: ACF MF, PersonalFN Research)

So where are HNIs investing?
With the equity markets in the developed economies - U.S., Japan and some markets in Europe - having done very well (as depicted in the table above) aided by some improvement in fundamentals, the wealthy investors are looking at investment opportunities in such markets.

Rise in HNI Folios
*Defined as individuals investing Rs 5 lakh and above
(Source: AMFI, PersonalFN Research)

According to the data available from the Association of Mutual Funds in India (AMFI), the Fund of Funds (FoFs) investing overseas have seen a rise of 15.3% in folios held by HNIs. Now this a sharp contrast to 11.0% drop in folios in the previous six months ending March.

It is noteworthy that strengthening of the U.S. dollar is of the main reason for HNIs to invest abroad via offshore funds. Moreover fear that the U.S. Federal Reserve may wind down its U.S. $85-billion per month bond-buying programme supported by signs of economic vigour depicted by the U.S. economy, which may have negative repercussion on Indian equities, has led them to evince interest in offshore feeder funds. Likewise with signs of Euro zone stepping out of a recessionary phase, also attributed HNIs investing in some of offshore feeder funds focusing on investing in such markets.

PersonalFN believes that yes indeed offshore funds offer geographical diversification to your investment portfolio. But you must also check whether the offshore funds you vie to invest in, are offering you adequate diversifications. Within the country you are taking exposure to, it is imperative for you to learn which themes / sectors the fund has exposure to - and that the fund does not hold a "portfolio concentration risk". So enough care should be taken while selecting offshore funds and you should be cognisant about the risk involved before investing your hard earned money.

Also, before you invest in offshore funds you need to ensure that your India Portfolio is in place. While we at PersonalFN are big votaries of diversification, this must not be aimless. We welcome the move to launch global funds and believe that investors can take the opportunity by investing in them to diversify their portfolios (and in this way de-risk). However, first they must ensure they have an India portfolio consisting of well-managed funds with established track records and investment processes. Only then must they invest in global funds. Put simply, global funds must not be considered as a stand-alone investment; rather they must form part of the investment portfolio.



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