Would you like to invest in stock markets abroad?
You can, via a mutual fund that buys stocks listed in stock exchanges abroad.
Unfortunately, there is only one such fund in the market -- Principal Global Opportunities Fund.
The good news is that since the finance minister has, in Budget 2006, eased some of the norms dealing with this investment; many more funds will now jump into the fray.
What's different?
There were too many restrictions, hence mutual funds steered clear of it. This Budget has changed that scenario.
Stock restriction
A mutual fund wanting to invest abroad could only buy stocks in companies that fulfilled two criteria.
This made it very difficult for funds to scout for good companies; there are very few that pass this requirement, probably just 40 odd stocks.
If the fund manager wanted to invest in good stocks, especially in technology and telecom and other sectors, he could not because these companies would not have listed Indian subsidiaries.
Now, this has changed. The above restrictions have been removed. They can invest in whichever stocks they deem worthwhile.
Amount restriction
There is a ceiling on the aggregate investments made by mutual funds in overseas instruments. The restriction, which was limited to $1 billion, has been hiked to $2 billion.
However, this includes the maximum collective amount of $1 billion to be invested in overseas Exchange Traded Funds (explained below).
Where would these global funds invest?
Now, if you think Indian stocks are overvalued, you can consider investing in stocks abroad. Of course, you can only do so via a mutual fund.
And, as of now, there is just one fund to consider.
Let's look at the portfolio of Principal Global Opportunities Fund.
Launch date
March 2004
Net Asset Value as on February 27, 2006
12.7836
One year return as on February 27, 2006
14.82%
Stocks it has invested in
Nestle SA (Switzerland)
SKF (Sweden)
Mitsubishi (Japan)
Atlas Copco (Sweden)
Ingersoll-Rand (USA)
Wyeth (USA)
Bayer (Germany)
Matsushita (Japan)
Sumitomo (Japan)
Procter & Gamble (USA)
3M (USA)
Colgate-Palmolive (USA)
Sulzer (Germany)
Timken (USA)
Denso (Japan)
Ricoh (Japan)
Sumitomo Wiring System (Japan)
Novartis (Switzerland)
Mazda (Japan)
Honda Motor Co (Japan)
What are Exchange Traded Funds?
ETFs are basically index funds (mutual funds that track a stock index).
An index fund is an equity fund that will only invest in the stocks of a particular index. Let's say an index fund is tracking the BSE Sensex, it will only buy the stocks that comprise the index. It will also buy them in the same proportion. So, if Stock A comprises of 10% of the index, the fund manager will ensure 10% of the fund's total investments are in Stock A.
In the above respect, ETFs are similar to index funds. Now, let's look at how they differ.
An index funds is just like a normal mutual fund where the Net Asset Value is available at the end of the day. So, if the NAV is declared at Rs 42, it stays constant for the entire day. The next day, the NAV will change depending on the worth and current price of its investments.
An ETF can be bought and sold throughout the day and the prices keep varying. In this respect, they are just like shares whose price keeps fluctuating.
As a result, they are bought and sold through stockbrokers (using a demat account) just like shares.
Essentially, ETFs are mutual funds that trade on the stock market like any other stock.
While there are a few ETFs in the Indian market, there is now scope for funds to invest in overseas ETFs upto a cumulative limit of $1 billion.
Data supplied by Value Research.
