Investors shun fund of funds investing overseas in FY15.

Moneycontrol Bureau

Sustained rise in share prices of Indian equities in current financial year has led to diversion of funds from one asset class to another. Fund of funds investing overseas (FOFIO) have seen net outflows in FY2014. Buoyant Indian equities have made investors prefer equity mutual fund schemes investing in India over FOFIO. Adverse changes in taxation treatment of non-equity funds introduced in budget 2014, which also impacted FOFIO, have also caused investors to stay away from these schemes, say experts.

According to monthly data release by Association of Mutual Funds in India (AMFI), FOFIO have seen net outflows of Rs 637 crore by end of December month in FY2014 as compared to inflows of Rs 414 crore in the same period previous year. “The net outflows can be attributed to redemptions by high networth individuals who invested lumpsum money in these schemes in the gloomy days of 2012-2013,” says Harshvardhan Roongta, principal financial planner with Mumbai-based Roongta Securities. A stable government in center has changed the investment outlook on equities from bearish to bullish. “Indian equities have posted good returns over last one year and the focus has changed from overseas equities to Indian equities,” says Anil Rego, CEO and founder, Right Horizons - an investment advisory and wealth management firm.

Another reason that has made the investments in FOFIO less attractive is the change of tax treatment. Change of definition of long term capital gains, from 12 months to 36 months in budget, have made investors to hold on to their investments in these funds for at least 36 months to qualify for indexation benefit. “This surely is a dampener for these funds,” says Roongta.

Though FOFIO have seen redemption pressures off late, financial planners make it a point that exposure to overseas equities is a must from the diversification point of a view. “One should at least have 10% of the portfolio in funds investing overseas as it brings in the much needed diversification to improve risk-adjusted returns of overall portfolio,” advises Roongta. Experts advise investors to go with broad based themes in international investing space. “Mining, commodities related themes may not work at this moment of time. Better to invest in USA focused funds,” says Anil Rego. Commodities such as metals and crude oil are under pressure and the prices are weak, thereby making them unattractive to invest. However USA economy is expected to post growth over next one year. Investing in USA offers exposure to global growth as multinational companies listed in USA earn their profits from various parts of the world, and not just USA. Also USA equities offer Indian investors exposure to themes that are not available in India, for example, search engines, semiconductors, technology companies and gaming.

Investors should invest in these funds with at least five year time frame. Gains in investments held for more than three years are treated as long term capital gains and taxed at 20% post indexation.

FOFIO as a category managed assets worth Rs 2668 crore, as on December 30, 2014. Franklin India Feeder – Franklin US Opportunities Fund is the largest fund with assets under management worth Rs 740 crore.