This US fund is not yet affected by SEBI’s overseas investing limits. Should you invest in its NFO?

Sachin Bansal-backed Navi Mutual Fund (MF) launched its US Total Stock Market Fund of Fund on February 4. While several MF schemes have been forced to stop accepting flows in their schemes as the limit of $7 billion on overseas investing in stocks and mutual fund units is close to getting exhausted, the separate $1 billion limit for investing in overseas-listed exchange-traded funds (ETFs) is still open.

As the US Total Stock Market FoF will be investing in an ETF—Vanguard Total Stock Market Index Fund ETF (VTI ETF) —it will be able to accept investor flows as long as these are within the limits. Within the overall limit of $1 billion, Securities and Exchange Board of India (SEBI) rules allow $300 million (Rs 2,250 crore) per fund house to invest in overseas ETFs. To be sure, there are other funds also out there that are able to invest in overseas markets as they are investing in global ETFs, although such funds are few.

So, should you invest in Navi MF's latest fund?

What works?

As of now, the US Total Stock Market FoF is the only fund in India that will allow investors to invest in a fund run by Vanguard, which is the pioneer of passive fund management in the world.

The VTI ETF tracks the CRSP US Total Market Index, which is a broad US index that covers nearly all of the US equity market, across multiple sectors and comprising more than 4,000 stocks. VTI ETF is the third largest ETF in the world with $1.3 trillion worth of assets.

Also read: How Navi's FoF on Vanguard US Total Stock Market ETF could add value to your portfolio

Unlike other US indices like the Nasdaq Composite or the S&P 500 that are large-cap heavy, the CRSP Market Index will capture small-cap stocks, mid-caps, as well as microcap stocks.

The US Total Stock Market FoF will be another low-cost passive fund being launched by Navi MF, which will charge investors total expense ratio (TER) of 0.06 percent.

What doesn’t

Financial planners say the fund is over-diversified.

“The US is the largest economy in the world, but it is not the fastest growing economy. However, technology is one sector that has been clocking strong growth in the US. So diversifying across a wide range of sectors in the US may not help investors,” said Rupesh Nagda, founder and managing director of Family First Capital.

Deepak Chhabria, chief executive officer and director at Axiom Financial Services, said diversifying across so many stocks will lead to a long tail-end portfolio. “These stocks will have marginal weights in the portfolio, which will not have a meaningful impact on the portfolio’s overall returns. Allocating marginal weights to so many stocks may not help investors,” he said.

Moneycontrol’s take

Right now, investors looking for global diversification have only few options left as mutual funds investing in overseas stocks and global mutual funds have been forced to suspend flows due to limits being reached. However, these limits are expected to be enhanced soon. You can wait until then and invest in US funds that are based on the S&P500, which is a more diversified index than the Nasdaq 100. Remember, Nasdaq 100 is heavily oriented towards the technology space with as much as 45 percent weight. The new fund offer of Navi MF’s US Total Market FoF is open till February 18.