Axis Global Equity Alpha Fund of Funds (FoF), a global equity feeder fund from Axis AMC, opened for subscription on Friday. The scheme 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.
International funds have gained strong interest in India this year. A record ₹400 crore was invested into international feeder funds in July, according to data from the Association of Muutal 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, Microsoft and Apple, and lowers the risk of country-specific factors dragging down India’s stock market.
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. However, this percentage fluctuates every year, with some periods of very little depreciation such as between March 2005 and March 2010, when it fell by 0.5% per annum.
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 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.
On the flip side, a large chunk of the underlying fund’s assets are invested in North America. Amazon, Alphabet and Microsoft are the top three holdings and these do not trade at anything close to cheap valuations.
International funds are taxed as debt funds, meaning 20% with the benefit of indexation after a holding period of three years and at income tax slab rate for lower holding periods. For periods of three years or more, they are relatively tax-efficient.
You can also invest in them in rupees and redeem in rupees, even though the fund invests in foreign currency. Investing in them is not subject to foreign exchange limits for investors. The expense ratio of the fund (inclusive of the underlying scheme) is capped at 2.25%, as per the Securities and Exchange Board of India rules, like domestic equity funds.
The underlying Schroders fund has delivered a compounded annual growth rate (CAGR) of 11.2% in rupee terms over the past five years and 10.5% since its 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. In other words, a synchronized fall in the world equity markets cannot be escaped from, even with global funds.
It is also interesting that the AMC tried to launch the fund in 2013-14, but a change in the tax rules for qualifying as long term from one to three years forced it to shelve the idea. “International diversification is a must, but I would suggest going for existing funds with an established track record,” said Viral Bhatt, founder, Money Mantra. Investors should look at the structure and returns of existing schemes, before taking a decision.