The Mutual Fund Show: How Investors Can Benefit From Fund Of Funds

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It seems that from an international investors perspective or taking an investment or international side, this is probably the most lucrative option to build ultimately. But just before that I heard you mention that taxation is the debt taxation. So, my question is, if I want to take an equity fund exposure, there is this fund of fund or less preferred route simply because I don’t equity taxation, I get that taxation?

RAGHAV IYENGAR: It’s a very valid point. So, if you want and you are really fast about taxation then you should invest in a fund of fund, which is putting all its money into ETFs as the underlying scheme. Like, if you invest in a fund of fund which has exchange traded funds as its underlying then you get the benefit of the equity taxation. But having said that, I think the key thing here is if you want, I think many people, or many investors actually want a sort of solution, where they really don’t want to know what’s happening to their money in terms of, they don’t want to track it, if I may put it this way. So, they have a very, very long-term horizon. So, they want diversification, they want security diversification. So sometimes they may just decide to put money into a manager, for example, who is putting money into other equity funds right and then saying that you manage the whole thing, you figure out how much I should buy a normal regular open ended, large-cap fund or a mid-cap or small-cap fund. So, these are also, there are set of investors who are happy to forego that little bit of additional taxation benefit that you get by putting money into a pure equity fund and coming directly. Let’s not also forget that earlier, of course, if you remember, some time back, equity funds are completely zero tax. Today there is a 10% tax so if it is okay for over three years, you are at about 20% less indexation. So, the longer you hold your money, the lower is obviously the tax rate. So sometimes that difference in tax is not that significant, like it used to be in the past.

Raghav, the other obvious question that comes to mind, what are offers from the Axis’ s side? What is the kind of exposure that one gets, but just before that, it seems to be obvious that on the international front, if I want an international investment, through Axis or whosoever, you in turn will invest arguably, in a fund existing overseas? So, in effect, my investments into any AMCs international offering are effectively an investment to an FoF?

RAGHAV IYENGAR: Mostly, and because very few fund managers have the ability to buy, sell or track research foreign stocks sitting in India, right? And if you have, it’s the same logic of a mutual fund. I mean, why are you interested in an MF money because we are supposed to be doing this, on full-time basis. Most investors do not have the time to really look at that, on a daily basis and the same logic applies in FoF international, right. So, what if I have capability sitting outside? Why should I go and reinvent that capability? I might, as well, feed into that capability. That’s why you have all FoF which are feeding into other funds, you know, the whole idea and this is something which retail investors keep on asking me. What is this feeding, this feeding is nothing when you put money into an FoF that effect essentially goes in invest into another point, that process of investing in another point is called feeding into?

I heard you mention that at Axis you have shown us something and something else, what are the offerings and particularly on the international side, since you guys have that association with the Schroeder’s what is the kind of offering that you have most of the international funds?

RAGHAV IYENGAR: We did some work, you know, Schroeder’s is a very, very preeminent global investment management company, with over a couple of 100 years of experience, largely in active management based out of London. With the AMC Axis they are part owners, its they have a joint venture with the Axis Bank. We have access to obviously, they are really top-ranking funds and a lot of new ideas which frankly, we don’t see coming into India, for the immediate future. So, it allows the investor two things, one is to obviously diversify his overall portfolio because the fact is that when you know, we did this very interesting set of funds where we had a 70% India exposure and a 30% global exposure and then the 30% global exposure, you really went and bought instead of FOMC we went and bought the top stocks in that particular scheme and we had a very, very satisfactory experience.

So, what it did to our investors was it gave you a much better risk adjusted return, rather than just putting money into a pure India equity fund. So, that is obviously number one, it really lowers your risk, number two, which is reasonably obvious is that there are mega companies outside, I mean, today the market cap of Apple is almost equal to the market cap of the entire Indian stock market, right. Yes, you can buy Apple now sitting in India, but yes, there are stocks also, you have to have some expertise, both in buying and selling. So, why don’t you get access to a whole list of companies, which are not traded or available to Indian investors, by investing in it? Number three, which is very, very critical is that the world is pivoting into new businesses right, artificial intelligence, electric vehicles, robotics, clean cities, green energy, these are again companies which are there in India, but they are in a very nascent stage. So, you will find lot of these companies in the private equity space but not in public space. And the world is there, but this is an old theme in the world. In some sense, we are in India now catching up, but these companies are now available abroad and listed and those offerings also are available to Indian investors. Lastly, off course, you have country specific funds also you can buy into U.S. large-cap fund or a China large-cap fund or Europe large-cap fund. So, that’s the other side of the business. Suppose you want to go and buy a U.S. large-cap fund, I think that’s available today to an FoF structure.

So, these are essentially the three, four big to me. The big three reasons are mainly diversification, because a lot of these things that we buy are available internationally, are not going to be in India, are not available in the size that we would like to have or where retail investor may not be available. Number two, it is extremely convenient today. Yes, there is. You can’t go and buy the stocks on your own, I mean, the RBI does offer you the LRS facility, you can go technically and go to a broker and pick up the stocks. But it is there is a little bit of pain involvement. I mean, the process of investing has become simple. But having said that, the other things are not yet easy in the sense of which stock do you buy or sell? How do you research all these talks and things like that? Thirdly, off course, I think very importantly, I think the whole risk adjusted story is really important from an India perspective. Today, lots of our needs are directed abroad, right, we have a fair if you ask most of Indian parents today, especially and across not only urban or even semi-rural, one thought in their mind is either an international holiday or an international education or anything, something to do with international, right. So, I think this investing abroad gives you that benefit, because in some sense, it is not exactly perfectly $ hedged, but it allows you to take benefit of some amount of depreciation of the Indian currency also.

So, I think if you ask me, lots of good reasons to put money, very beautiful way to do it. First, it is super simple. And it is absolute retail fund, you can come in with as low as 5,000 rupees, you can get set up a SIP, you can do everything which you do on a regular Indian mutual fund, can be done with an effort. One thing that you must again, keep in mind is that because we are investing in another fund and the international pay out cycles are a little different from what we follow in India. I must say we must complement our regulator, a lot of monies that are received abroad are not, I think our payment cycles are far, far superior actually. So, in that sense, we may be technically a developing market, but a lot of our processes are actually way ahead of some of the international markets.

So, your outflow when it comes is not normally a T+3 that is T+3 to give the redemption today. Normally in an Indian equity fund, we normally get our money in three working days but here, it could be anywhere from maybe three to seven days, depending on the scheme that you are in and which country you are invested in. So, that again please keep that in mind when you are investing in a fund. And more importantly, when you are redeeming because I have seen many people assume that since India pays in T+3, FoF will also pay T+3 but that is not the case normally, because there is an additional lag of getting money from that international fund into India, then obviously, we are passing it on to the investor. So that’s the second caveat that I would like to just keep it with you. Apart from the first one which I told you that FoF is a common word, but it covers a massive range of investment opportunities available.

I don’t know if you got a chance to hear most of the things that Raghav of Axis was talking about. But is there something which you would want to add to by an investor should or should not choose the FoF options, both on the domestic or international side?

NIRAV PANCHMATIYA: Yeah, I heard Raghav, I think one of the biggest advantages of international FoF, not necessarily domestic FOF is that you can avoid your own country bias. So, I think being Indian domestic investors, we are over exposed, when we see our network, if we have equity investment, whether through mutual funds or through share markets and then we have real estate, all of these are INR assets. So, if we even amongst our friends and families, if you do a survey, very few would be having, barring ultra HNIs. We leave them aside but very few will be having any international currency exposure. Nowadays, when most of our children are wanting to study abroad or leave some people are wanting to settle abroad and there is no Indian would not want to go for vacations abroad. In that case having some form of $ assets is very important to, I think, FOF gives you a takeaway from home country bias and takes you away from single country exposure risk.

Secondly, there is this very important statistic that I would like to share that MSCI World Index Fund as statistically been proven to have a very low correlation with Indian equity market. So, they say that over a three, five, seven and 10- and 20-years period, the correlation between MSCI World Index Fund and Nifty Total Return Index is only point four, that means both these markets, the international market and Indian domestic market, very rarely except for events, black swan events like Covid and all the very rarely they go down together, or they go up together. That I think is a very, very important reason why one should have an international FoF, and another is currency exposure. So, over a five- ten, 15-20 years period again, it is believed that rupee has depreciated at a CAGR of 2.3% over a 20-year period against the $. Now if I am an Indian having any business interest abroad, or if my children are young and they are planning to move for education abroad, this currency depreciation itself will hit me a lot. It doesn’t apply if they are planning to do their education in India that also ensure, you know, asked me to have some international exposure by the International FOF. And It is I think, one of the cheapest ways to have n exposure to a U.S. $ denominated asset, some FOF like a U.S. equity fund or a European equity fund and the day you buy that particular fund, your INR will get converted into USD at the current U.S. $ prevailing rate and when you sell it three, five, ten years down the line, your $ INR will get converted on the prevailing rate, on that date. So, you are basically locking in U.S. $ assets that I believe are three main reasons why you should have an international FOF, and one last major reason would be that there are certain themes, which are still not available in India, in mature markets like India. We are mature but we are not as mature as markets like U.S.

So, there are these fine stocks, Facebook, Apple, Alphabet, Netflix and all. I think it will be another 10-15 years before you have product companies like these in India. How do you get exposure to these stocks? Secondly there are these R&D, Pharma companies like Abbott, Modena are like Pfizer, you don’t have exposure to them here in India. Third, there are these AIML companies, machine learning and artificial intelligence companies and even Raghav pointed out that we will not be having these companies, at least for another decade, in India. So, this is the last major reason why you should have exposure to international FOF.

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