In January 2008, our equity indices had grown 50 per cent over a one-year period, our economy was growing at 9 per cent plus, foreign institutional investors (FIIs) had pumped in $19 billion and inflation was well under control.
Cut to July 2008, our indices have lost 40 per cent from their highs, inflation is at a 13-year high of 11.62 per cent, gross domestic product (GDP) growth estimates are certainly lower. The future seems more than a tad uncertain, with elections looming large and oil prices out of the control.
In such a grim scenario, Indian investors are at a loss on where and how to play the markets. It could be the right time to opt for geographical diversification of your funds.
ING Mutual Fund has launched a new fund, "ING Latin America Equity Fund". This fund of funds, which is a feeder fund (that is, it will invest in other funds with a proven track record instead of directly investing in stocks of companies in this area) will invest in the 13-year old Luxembourg-based ING (L) Invest Latin America Fund. As the name suggests the mother fund invests in stocks of Latin American countries such as Brazil, Argentina, Chile, Colombia, Mexico, Peru, Venezuela, Uruguay and Panama.
The World Bank has rated countries like Mexico, Brazil, Argentina and Chile as one of the top emerging markets in the world. A few reasons why these countries are economies to invest in are as follows:
Favourable demographics: The population of Latin America is greater than that of US, Europe or Japan, which implies a bigger consumer market. Also, the average age of population in Latin America is 25-30 years. This is a young population which will spur greater consumption as well as a growing work force.
Robust economy: Most of the Latin American countries have a better current account balance, have huge export potential and their combined foreign exchange reserves are higher than that of India's.
Infrastructure: Most of the Latin American countries have better infrastructure than India. They have better Internet and telecommunication facilities than India. A well-educated population makes it a desirable outsourcing destination.
These countries have a low correlation against each in the equities market. that serves as a natural hedge. These countries also have a very low correlation with India.
The portfolio composition of the ING (L) Invest Latin America Fund mother fund is like this:
Country Percentage (%)
1.Brazil 59
2.Mexico 28
3.Colombia, Chile, Peru, Argentina 3 each (approx.)
As of April 30, 2008, in the last three years, this fund has given a return of 46.38 per cent (in terms of Indian currency) compared 45.45 per cent to the benchmark fund MSCI 10/40 EM Latin Am Index.
The Indian NFO closes on July 10, 2008. Since it is a feeder fund, it will be treated at par with a debt fund and taxed accordingly. That is, short-term capital gains if any, will be added to your income and taxed at the marginal rate. The long-term capital gains will be taxed at 10 per cent plus surcharge without indexation or 20 per cent plus surcharge with indexation benefits.
Load Structure:
Application Size (Rs) Entry Load Exit Load
<5 crore 2.50% 1% if redeemed before 180 days
>5 crore Nil Nil
Minimum investment: Rs 5,000
Conclusion: This is the time when Indian investors should be more open to the idea of diversification. Latin America appears to be a desirable destination. However, investors should keep in mind the risk factors, including the currency risk which is always present while investing in a foreign asset.
The writer is head, mutual funds, Derivium Capital