AMCs launch new funds with overseas exposure to cut risk

By Urvashi Valecha

As the equity markets continue to hit new highs every week, mutual fund houses are looking for ways to diversify risk. One of the strategies adopted by the industry is to invest in global markets. Two new fund offers (NFOs) that opened for subscription last week will invest a part of the investible corpus in overseas stocks.

Axis Special Situations Fund and the Aditya Birla Sun Life ESG Fund, which opened for subscription last week, would be investing up to 30% and 35% of corpus in foreign equity markets. According to the fund houses, global equities as an asset class will help investors diversify their exposure to equities and help de-risk the portfolio. Additionally, investing in foreign equities not only helps investors generate better returns over a period of time, but also gives them access to global companies and growth stories.

Ashish Naik, fund manager – equity, Axis AMC, said, “Foreign equities should be looked at as a different asset class altogether which offer diversification. One can get an exposure to a different economy which has low correlation with the Indian economy and can diversify risks.”

These funds are being pitched as thematic funds having the potential to generate better returns because of diversification. There are many fund houses that are launching multi-asset funds and funds that invest in both Indian and foreign equities. This could become mainstream.

The compounded annual growth rate (CAGR) returns from domestic equities have been 9.4% for the last one year, 9.05% over three years and 11.07% over five years. Market experts believe that investors need to tone down their expectations from the market despite the sharp rise in markets since March.

According to experts, products that offer exposure to overseas markets are more suitable for matured investors who have a sizable exposure to domestic equities and are looking to further diversify their portfolios. G Pradeepkumar, CEO, Union AMC, said, “These kind of funds which invest in foreign equity are for investors who have a sizable exposure to the Indian markets and want to diversify their portfolio. They should be subscribed to more from the view of diversification and de-risking rather than from the view of generating higher returns.”

Most funds that diversify their investments by putting capital into foreign equities as an asset class have managed to beat the CAGR returns that the benchmarks have given over a period of one year, but when compared to CAGR returns over three- and five-year periods, they have underperformed the indices.