Chasing Chinese dragons: What's in store for Indian mutual fund investors?

The recent turnaround story of Chinese equity market has caught Indian investors’ attention. After three years of underperformance, Chinese stocks rallied over the last couple of weeks due to the stimulus measures announced by the Chinese government. China’s CSI 300 index gained about 25 per cent owing to the announcement.

Experts exuded confidence that China's equity market is positioned for a more positive outlook, thanks to the government's policy initiatives and attractive valuations. The recent measures were aimed at supporting a weak property sector, increase retail consumption and boost capital markets (Read here: Can Chinese markets continue to reward investors post 25% rally?).

With four domestic mutual fund schemes that provide access to the Chinese equity market, we explain the portfolio, performance and suitability of these schemes for Indian investors.

An opportunity in the world’s largest emerging market

At present, two fund of funds (FoFs) and two passively managed Exchange Traded Funds (ETFs) are available for Indian investors. The total corpus managed by these schemes was Rs 2,683 crore as of September, 2024.

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Edelweiss Greater China Equity Off-Shore Fund (EGCEOF) and Axis Greater China Equity Fund of Fund (AGCEF) invest in a fairly diversified portfolio that cover the Greater China region that include the mainland, Hong Kong Special Administrative Region (SAR) and Taiwan. Meanwhile, Nippon India ETF Hang Seng BeES and Mirae Asset Hang Seng TECH ETF track the performance of the stocks listed in the Hong Kong Stock Exchange.

Niranjan Avasthi, Senior Vice President and Head-Products, Marketing and Digital at Edelweiss Mutual Fund, said, “The Shanghai Stock Exchange (SSE) is in Shanghai, mainland China, and operates under Chinese regulations, listing domestic companies with trades mostly in yuan (CNY). Hang Seng Index (HIS) is based in Hong Kong, a more international market with trades in Hong Kong dollars (HKD). It tracks the top companies listed on the Hong Kong Stock Exchange, including many Chinese firms, and serves a more global investor base.”

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Shanghai is a more diversified and well represented market when it comes to linkage with China’s economy. More emerging opportunities are present in Shanghai than in Hang Seng, Avasthi added.

Edelweiss Greater China Equity Off-Shore Fund

• EGCEOF is a fund of fund investing in the JPMorgan Funds – Greater China Fund (underlying fund) that invests primarily in companies from the People's Republic of China, Hong Kong SAR and Taiwan, known as "Greater China".
• It chooses Chinese companies that are leaders in their respective fields that are with higher return on equity and lower debt.
• It is a fairly diversified portfolio holding about 60 stocks across industries from China, Hong Kong SAR and Taiwan. Major sectors include information technology (IT), consumer discretionary and communication services.

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Axis Greater China Equity Fund of Fund

• AGCEF is a fund of fund investing in units of Schroder International Selection Fund Greater China Fund, an actively managed fund that invests in the equity-related securities of companies in People's Republic of China, Hong Kong SAR and Taiwan.
• The investment mandate of the underlying fund is similar to that of the JPMorgan Funds-Greater China Fund (the underlying fund of EGCEOF).
• Apart from the equity-related securities of People's Republic of China, Hong Kong SAR and Taiwan companies, it also allocated about 1.5 per cent in the Australian equities listed on the Shanghai, Shenzhen and Hong Kong exchanges.
• Both EGCEOF and AGCEF follow MSCI Golden Dragon Index as benchmark that comprised 711 stocks in its basket as of September 30, 2024. It captures the equity market performance of large and mid-cap China securities as well as securities classified in Hong Kong SAR and Taiwan.
• The underlying fund of AGCEF comprised 82 stocks as of September 2024.

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Nippon India ETF Hang Seng BeES

• Nippon India ETF Hang Seng BeES (Hang Seng BeES) is one of the top-traded ETFs in India. The daily average volume over the last three months on the National Stock Exchange (NSE) was Rs 7 crore.
• It provides an opportunity to Indian investors for passive investments in a well-expanded portfolio of largest and most liquid companies listed in Hong Kong stock exchange.
• Launched in 1969, the Hang Seng Index is a free-float market capitalisation-weighted index of the largest companies that trade on the Hong Kong Exchange. It provides exposure to Hong Kong SAR and Chinese markets.
• The index is organised into the four sub-sector indices of finance, utilities, properties, and commerce and industry.
• It comprised 82 constituents and represented about 67.5 per cent of total market capitalisation of Hong Kong stock exchange as on August 31, 2024.

Mirae Asset Hang Seng TECH ETF

• Mirae Asset Hang Seng TECH ETF is the passively managed ETF, investing directly in stocks of Hang Seng TECH Index in the same proportion as the underlying Index.
• The daily average traded volume of the Mirae Asset Hang Seng TECH ETF on the NSE was Rs 4 crore, over the last three months.
• Hang Seng TECH Index has 30 large tech-themed Chinese companies listed on Hong Kong Stock Exchange. They engage in  internet (including mobile), finTech, cloud, e-commerce, digital or autonomous vehicle stocks.
• These companies are considered innovative by operating a technology-enabled business, with strong Research & Development  (R&D) investment or exhibit high-revenue growth.

Should you invest?

China offers complementary strengths for Indian investors, who are seeking diversification from the global emerging markets. While the India’s strengths lie in IT, financials and consumer discretionary, China dominates in industrials, materials, consumer discretionary, and technology hardware.

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Despite ongoing challenges, China's market is positioned for a more positive outlook. The government's recent policy initiatives, combined with attractive valuations and compelling investment opportunities, make this a favourable time to consider investing in the Chinese market, according to Avasthi.

However, experts caution about sustainability and any lack of new stimulus could cause disappointment for Indian investors. “Though the stimulus announcements in China continue, investors are sceptical about the recovery. Weaker exports and struggling property market could hurt investors, if they still want China fund in their portfolio,” said Ravi Kumar TV, Director, Gaining Ground Investment Services.

Indian investors can consider a part allocation to China-focussed funds. “While the short-term volatility is inevitable, matured investors with high-risk profile can consider parking about five per cent of their portfolio with time horizon of five years and more,” said Prashant Rajan, a Nagpur based mutual fund distributor.

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