Surya Bhatia, Asset Managers, Delhi, says that there is a big gap in the suite of offshore feeder funds that are currently available in our market, which fund houses would do well to plug. Surya - one of Northern India's most successful advisors, worries whether investors are considering global funds now for the right reasons, or perhaps the wrong reasons. He believes advisors have a crucial role to play in ensuring that their clients invest globally for the right reasons and not the wrong ones. Read on as Surya explains the 4 key points he urges advisors to help clients with, to ensure that they invest successfully in global markets.

Our experience with global diversification is that the concept seems to be much better appreciated among well travelled, globally aware HNIs. I don't think there is anything in the products that suggests they are not suitable for retail investors - its just that HNIs who travel overseas and are more aware of global trends can relate to global investing a lot more.

I think global funds - or feeder funds that invest into global funds have their merits from a portfolio diversification point of view and perhaps 5-10% of portfolios can be allocated to these funds within an asset allocation. However, there are a few things that we must keep in mind when we discuss global investing with our clients.

1. Is the product appropriate for the need

We keep discussing the currency hedging aspect as a key benefit of global investing. No doubt, there is a hedge - but what really matters is the need for which you are adopting this strategy. If for example, your client's son or daughter plans to study overseas 3-5 years from now, your client may want to hedge the currency aspect, because there is a known outflow in dollars some years down the road. But, the issue is that most if not all the feeder funds on offer in our market are equity based products. So, while you may hedge the currency, you are taking a market risk on a foreign market. Would you normally invest in an equity fund for a higher education need 3 years from today?

I think there is a big gap in the feeder funds product suite in the market today. What we really need, for clients who intend sending their children overseas for higher education, is low risk feeders. That way, you get the currency hedge you are seeking, without unnecessarily taking on a market risk in the bargain.

2. Is recent performance the key influencer?

The last two years have seen a combination of weak Indian markets, strong global equity markets and very weak Indian currency. When you put all this together, the differential in returns between domestic equity funds and global feeder funds is very stark. Clients who get influenced by only these recent performance numbers, must be guided properly. They must understand that going forward, the currency could go either ways in the short to medium term. Expecting only a one way street is not a reasonable expectation. Likewise, expecting that Indian markets will only go down and global markets will only go up from hereon is also a bet which could go either way. Ultimately, the decision on global investing is one that has to be driven from a diversification objective within an overall asset allocation and not in the quest of near term performance on the back of recent strong performance.

3. Do your clients understand the tax implications?

Many investors don't fully appreciate that global equity feeder funds do not enjoy the same tax treatment as domestic equity funds. They are taxed akin to debt funds. You will get an indexation benefit, but the fact is that there is a tax incidence on long term holding, unlike domestic equity funds. Its important to ensure that your clients understand this before taking a decision to invest.

4. Look for asset classes not available in India

I think it makes a lot of sense to look internationally for asset classes that you think add value to client portfolios but which are not currently available in our market. One such category we are looking at are REITs - real estate funds that invest for stable rental income and some capital appreciation in the long term. I know there is now a move to finally bring in REITs into our country - but, for this to really succeed in our market, we need a far more transparent real estate market in India than what we have at the moment.

To sum up, I think investing globally makes sense as a portfolio diversifier, especially for HNI clients who can relate more easily to the concept. It is however important to ensure that clients invest with the right expectations and for the right reasons - and that is where we as advisors have a crucial role to play.

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