Choosing an international fund for my portfolio

Since quite some time I had been thinking about adding an International fund to my mutual fund portfolio, to give it a global edge :)
An international fund provides the much needed diversification to your portfolio. Just to quote an example say a scam like Satyam need not necessarily have an effect on stock markets in other countries. Also the economic situation may not be equally bad in all countries at the same time. Right now most of the developed world is in recession, but developing countries like India/China are still growing ( albeit, at a slower pace ). This story may reverse in future. So there is a need to diversify globally.

But there are some risks also associated with global funds:
1. Foreign exchange risk: Say Rupee appreciates heavily against the US dollar then the investors may actually end up losing money in this fund, even though their holdings may have appreciated in US dollar terms.
2. Lesser tax-benefits: A mutual fund has to invest 65% or more of its assests in the Indian equity market to qualify as an equity-oriented scheme. Since global mutual funds invest in the international market they are not eligible for tax-benefits offered to equity mutual funds in India ( like tax-free dividends, zero tax on long term capital gains ).
3. Fund-manager risk: The fund manager may not be well-versed with the international markets, which can be a reason of worry for the investors.

When I went about looking for an international mutual fund, the following were my requirements:
1. Well diversified global equity fund
2. No sector or country bias, no developed/developing economy bias.
3. Low fees
4. Minimum exposure to India, as I already have my Indian equity portfolio in place.


Let's see what are the available options and choose the best out of them:

Franklin India International : This is not an equity fund, but a debt fund which invests in US govt. securities. Verdict: NO

Kotak Global Emerging Market : As the name suggests this is a fund that invests in the emerging markets ( India, China, ME, South America ). And also this acts as feeder fund where the money invested is routed into the TRP SICAV Global Emerging Equity Fund, which means two level of fees. Verdict: NO

Principal Global Opportunities : This again is a feeder fund for PGIF Emerging Markets Equity. Same comments as for the above Kotak fund. Verdict: NO

Fidelity International Opportunities : Has very little international exposure. Maybe the fund manager is trying to make this fund get the tax benefits of equity-oriented mutual funds in India by holding atleast 65% assets in Indian stocks. Verdict: NO

ICICI Pru Indo Asia Equity : Fund objective states that it will concentrate on Asia. Its holdings also show that it holds around 65% assets in Indian stocks ( presumably, for tax-benefits ) and the rest in IOF Asian Equity Fund for exposure to Asian stocks. Verdict: NO

Tata Indo Global Infrastructure : The fund objective has a sector-bias and will primarily invest in Infrastructure companies. Just like the ICICI Pru Indo Asia Equity this has too much of India exposure. For global exposure it currently relies on two funds viz, INVESCO Asia Infrastructure and Credit Suisse Emerging Market which displays an Asian/Emerging market bias. Verdict: NO.

Birla Sun Life Commodity Equities : Birla Sun Life has three international commodities fund, but since they have a sector bias my verdict is no. There are three different variants of this fund global agriculture , global multi commodity & global precious metal. Verdict: NO

Kotak Indo World Infrastructure : Sector-bias, plus too much of Indian holdings. Verdict: NO

Birla Sun Life International Equity : This has two plans. Plan A invests upto 100% percent in international equity and has S&P Global 1200 as the benchmark. Plan B invests atleast 65% in Indian markets with the rest going to International markets. Since I am looking only for a global fund, Plan A suits my need. Except for the fact that the fund expenses are a bit on the higher side ( around 2.34% ) everything else is almost perfect. It is well diversified across sectors and countries.

Hence from all the available options presently, I believe Birla Sun Life International Equity Plan A is the only one that suits my need. I wish there are more global funds from other fund houses as well. I don't know if this is the right time to start investing in the international markets, so I am opting for an SIP.

Disclaimer: This is not a mutual fund recommendation service. The above analysis was done only for personal use by the author. Do consult a financial advisor before making any investment decisions.

On Reader's request: Tata Capital NCD and some advice on Insurance

A reader had requested me to post few details about Tata Capital NCD. So here it goes:

1. NCD are being offered in demat format only. Hence you need to have a demat account before you can apply for NCD.
2. The prospectus can be found here.
3. NCD are being offered in four options: Monthly interest, Quarterly , Annual & Cumulative Interest. ( Refer to Page 26 & Page 137 of the prospectus for complete details about these options ).
4. For Annual & Cumulative option, the interest rate is 12% p.a. For monthly option it is 11% p.a. and for quarterly option it is 11.25% p.a.
5. The NCD have a tenor of 5 years from the date of issue. Tata Capital can call for early redemption of NCD after 3 years ( 3.5 years for Quarterly option ). Similarly you can also pre-maturelty withdraw after 3 years ( 3.5 years for Quarterly option ).
6. Minimum investment amount is Rs. 1 Lac for Monthly Interest option. For all other options it is Rs. 10,000/-
7. No TDS on interest, if held in demat form.
8. How to apply: Approach Integrated Enterprises or you can directly contact the registrars Karvy Computerhare to obtain the application form and apply.

Disclaimer: This is not an offer for sale or investment. Please refer to the offer prospectus for complete details.

Chinmay shah has asked me a question related to Insurance. You can read it here. My answer is below.
Generally combining Insurance and Investment is not good. Hence ULIPs are a strict no-no in my opinion. Many good financial advisors have written extensively about the dis-advantages of ULIPs. You can read them here, here and here.

Since you want to invest for your child's education, it means that you need the money atleast 15 years from now. You can use a combination of PPF & SIP (Systematic Investment Plan ) in mutual funds to achive your goals.

1. PPF : You can open a PPF account in the nearest SBI branch or Post Office in your or your child's name. Use an agent to open PPF account, the agents make the job much simpler. PPF offers 8% p.a. ( interest rate may change in future ) which is tax-free. The scheme maturs after 15 years. For more details refer here.

2. Systematic Investment Plan: To understand SIP you can read this article. In simple terms SIP is an investment in mutual funds distributed over a period of time.

Below is a sample calculation, you can adjust it to your needs:
Amount required after 15 years: Rs. 25,00,000/-
Amount you can save every month for your child's future: Rs. 5000/-
Returns offered by PPF: 8% p.a. ( assumed )
Returns offered by SIP in mutual funds: 15% p.a. ( assumed, a conservative estimate ).

Let's allocate your monthly savings of Rs. 5000/- as:
Rs. 2000 for PPF and Rs. 3000 for SIP in mutual funds.

Now let's calculate whether you will be able to achieve your goal of accumulation Rs. 25 Lacs after 15 years.
Go to the recurring deposit calculator.

Calculation for PPF:
Recurring deposit amount: 2000
Frequency of deposit: monthly
Interest rate: 8
Duration: 180 months

Amount on maturity: Rs. 696690.32 ( ~ Rs. 7 Lac )

Calculation for SIP in mutual funds:
Recurring deposit amount: 3000
Frequency of deposit: monthly
Interest rate: 15
Duration: 180 months

Amount on maturity: Rs. 2030589.27 ( ~ Rs. 20 Lac )

After 15 years you must have accumulated around Rs. 27 Lacs ( based on the returns we have assumed ). The actual returns may be higher or lower.

By varying the your monthly contribution and the allocation between PPF & SIP in mutual funds you can achieve your financial goals easily.

Choice of mutual funds for SIP: I would recommend you to invest via the SIP route in 3-4 mutual funds of the equity diversified type. If you are first time investor in mutual funds, you can ask your broker/agent/financial advisor for help. You can also make use of Value Research ratings to choose an equity-diversified mutual fund.