Axis Global Equity Alpha Fund of Funds (FoF), a global equity feeder fund from Axis AMC, opened for subscription on Friday. The FoF leverages on a tie-up Axis AMC has with Schroders Plc, a UK-headquartered global asset manager with assets under management of around $700 billion.
Indian funds that invest the entire corpus into another fund located outside India are called global equity feeder funds. Axis Global Equity Alpha FoF will feed into Schroder International Selection Fund Global Equity Alpha.
A record ₹400 crore was invested in global feeder funds in July, as per data from the Association of Mutual Funds in India (Amfi). India accounts for just 3% of the world’s GDP in nominal terms, which means those who are invested solely in India miss out on the growth of the remaining 97%.
International investing gives access to strong global companies such as Alphabet and Apple, and lowers the risk from country-specific factors.
Global investing also gives the benefit of currency diversification. An Axis presentation shows that the rupee depreciated by around 3.8% per annum against the US dollar from March 2005 to March 2020. This percentage fluctuates every year, with some periods of little depreciation.
Axis Global Equity Alpha FoF has a global rather than a single-country focus. This is unlike most international feeds in India, which are centered around the US market which now trades at rich valuations. Its market cap-to-GDP ratio is close to 190%, far higher than other stock markets, including India’s which is at 98%. Higher the ratio, the more richly valued a market is.
“A diversified global fund compared to a single-country feeder is a bit like choosing a diversified domestic fund compared to a sector fund. Diversification brings down your risk substantially,” said Ashwin Patni, head, products and alternatives, Axis AMC.
However, a large chunk of the underlying fund’s assets are invested in north America.
Though the fund invests in foreign currency, you can invest and redeem it in rupees. Investing in it is not subject to foreign exchange limits. The expense ratio of the fund (inclusive of the underlying scheme) is capped at 2.25%.
The underlying Schroders fund has delivered a compounded annual growth rate (CAGR) of 11.2% in rupee terms in the past five years and 10.5% since inception in 2005. This is almost exactly what the MSCI World Index delivered over both the periods. A collapse in world equity markets in March lowered the MSCI World Index’s 15-year return to as little as 7% CAGR, the Axis presentation shows. So, a synchronized fall in world equity markets cannot be ruled out, even with global funds.
International funds are taxed as debt funds, meaning 20% with the benefit of indexation after a holding period of three years and at the slab rate for lower holding periods.
“International diversification is a must, but I would suggest going for existing funds with an established track record,” said Viral Bhatt, founder, Money Mantra. Look at the structure and returns of existing schemes, before taking a decision.