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How to make money from other nations' growth

In fact, the domestic mutual fund industry launched close to two dozen offshore funds during 2013-14 to capture the turnaround in the international markets and when the domestic stock market was not doing too well.

June 20, 2015 12:37 IST | India Infoline News Service

If the US economy is growing well as the Federal Reserve wants us to believe, is there a way for investors from India to get a slice of that growth? Yes indeed. One way is to use the offshore mutual fund route to take exposure to overseas markets.
 
By definition, an offshore fund is a mutual fund that that invests in an offshore jurisdiction or outside its domiciled territory. The Indian mutual fund industry has quite a few such products, which include fund schemes line Franklin US Opportunities Fund, Reliance US Dollar Fund, DSP BlackRock US Flexible Equity Fund, DWS Gold and Precious Metal Offshore fund, HSBC Brazil Equity Fund and ICICI Prudential US Bluechip Equity Fund.
 
In fact, the domestic mutual fund industry launched close to two dozen offshore funds during 2013-14 to capture the turnaround in the international markets and when the domestic stock market was not doing too well.
 
These are mostly offshore fund-of-funds, or feeder products which invest in equity funds in the US, Europe or other emerging markets. These products are available to both retail and high networth individuals (HNI).
 
Last month, Sebi simplified the norms for domestic funds to manage offshore pooled assets,by dropping the '20-25 rule', which required a minimum of 20 investors and a cap of 25 per cent on investment by an individual for funds from low-risk foreign investors.
 
As per the existing norms, a fund manager who is managing a domestic scheme, is allowed to manage an offshore fund, subject to three specific conditions.
 
The first requires the investment objective and asset allocation of the domestic scheme and of the offshore fund to be the same. The second condition requires at least 70 per cent of the portfolio to be replicated across both the domestic scheme and the offshore fund.
 
The third condition, which was being considered as the most stringent by the industry, requires that the offshore fund should be broad-based with at least 20 investors with no single investor holding more than 25 per cent of the fund corpus.
 
In order to take exposure to such funds, there are a few basic needs. The first requirement is to understand the dynamics of global economies, various policy measures as well as currency equations. Because apart from volatility in stock prices and volumes in different capital markets, interest rates, currency exchange rates, changes in government policies, taxation laws and other political and economic developments can impact returns of such funds.
 
The currency risk is the biggest one here. An unfavourable movement in either currency -- be it yours or the currency of the country where you have invested -- may may spoilsport and erase most of much of the gains that your investment may accrue over a period. And currency movements depend on a host of reasons, some of which can be currency specific and some not.
 
Yet, all investment products involve a certain risks and it’s worth taking such risk depending on the availability of your surplus money and the flexibility and time horizon available to you to use your cash to take such a risky exposure.

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