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From B School to Microfinance

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Investing Abroad? wait!

Fund companies are offering a chance for geographical diversification.

India now attracts the whole world's attention. From direct investors who put money in Indian business operations to financial investors who buy Indian equities, foreign institutional investors are scouring India for opportunities. India is now mentioned in the same breath as China because India now offers both domestic business opportunities and skills to grab export opportunities. The Indian market has gone up 100% in two years pulling Indian mutual funds out of a decade of pathetic performances. Attracted by this, Indian savings are moving into Indian mutual funds which are recording massive collections. In a situation like this, in the last budget the Finance Minister raised the ceiling on aggregate investment by mutual funds in overseas instruments from $1 billion to $2 billion. More importantly, the government has decided to remove the silly requirement of 10% reciprocal shareholding for investment abroad. Under that rule, a domestic fund could invest in the stocks of only those foreign companies, which have a listed Indian subsidiary with at least a 10% share holding in it.

When India is a hot destination for the rest of the world, why would you put your money anywhere else? Well, the government of India, in its wisdom has allowed this and Franklin Templeton has been first off the mark to seize this opportunity. Should you bite? Theoretically, there is a case for investing outside the home country, especially when it seems that for a variety of long-term reasons, the domestic economy will not do too well. Companies may be trapped in structural problems of the macro economy (as in the case of African countries or India of the mid-90s or Germany and France now) and therefore investors would be better off investing in countries where entrepreneurial activity is far more rewarding.

But that is theoretical. It can be nobody's case that enterprise is not rewarding in India. Certainly not now. There is an upsurge of activity in India and for the first time ever, all sectors are booming at the same time, in a self-reinforcing manner.
There is a second reason to put your money abroad and that is valuation. It could well be that a certain market today is in the same state as India was in 2003 and it may make sense to get in there. Unfortunately, this too does not apply. From Japan to Kuwait and from New Zealand to Brazil, markets are making multi-year highs everywhere. It would have to be sheer wizardry to be able to discover undervalued opportunities in other parts of the world. Here are some reasons to avoid this fund now:

Monitoring
The fund would be invested in either another country funds or stocks. How much do you know about them? Domestic investments are something we understand best. There is nothing you know about Brazil's Companhia Vale do Rio Doce or Korea's Korea Telecom.

Track record
It is not clear whether Templeton India's fund managers would be the ones ultimately picking the global stocks and on what basis. Templeton is a global organisation with varying investment styles. They track the global economy, various countries and markets. This can be a hindrance or an advantage. After all, Templeton's domestic performance under the emerging markets guru Dr. Mark Mobius was quite pathetic before Templeton India bought Pioneer and the fund management team from Pioneer took charge. {break}

Diversification
Funds that put your money in other countries offer another round of diversification. The question is: do you need it? We don't see how you can derive additional returns without reducing risk. After all, understanding the risk profile of companies and funds is tricky enough. Understanding the risk-profile of countries is nearly impossible.

Leaving aside the risk aspect for the moment, where are the returns? The US markets which are the biggest, the busiest and among the most transparent have been poor performers. Indeed, it could well be that a fund reduces your return when it invests in a different country. The S&P 500 went up just 11% in the last 12 months. Markets of Germany, Japan and Canada are up between 25%-40% - much lower than India and Brazil.

Every year some international market will perform supperbly But many of these markets are just too volatile. In the first five months of 2004, the China Fund, listed in the US lost 50% of its value. Between 2001 and 2002, the Canada Index lost 60% of its value and from March of 2000 to October of 2003, the German index dropped 73%.

If you must invest…
It will be necessary to monitor whether the fund has a strategy of geographical diversification. A fund that follows the latest fad and invests in geographies that are currently doing well can be leading you into a high-risk zone. While raising money a fund can say several things as a matter of strategy but what it actually does is another matter. This needs to be monitored. It would be great if money is spread over key economic regions. In fact, when investing internationally, a fund has a huge menu to pick from. It can choose not only from fast-growing countries but stocks that are growing fast in an otherwise slow-growing region. It can buy regional funds or indices that spread their investments across a whole region. It can spread its money between momentum and value-based countries and sectors. The question is why would you want to your money to do any of all this? Because you trust your fund manager blindly?  That is not a very sound argument.

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