Japanese funds should be second choice

International mutual fund schemes haven’t had the best run compared to Indian equity funds in the past year. The best performing large-cap Indian scheme – HDFC top 200 – has given an annualised return of 64.62%. In comparison, Tata Growing Economies Infrastructure Fund has returned 28.64%. Schemes focussed on Asia have done worse in the past year. JP Morgan’s Greater China Equity Fund has returned 14.37% and Mirae Asset China Advantage Fund has returned 12.58%.

But the spate of schemes targeting global markets continues. Fund houses have launched 10 schemes since January 2014. The new fund offering – Reliance Equity Fund – is the latest one and first scheme that targets the world’s third largest equity market with $5 trillion market capitalisation. The scheme, which closes on August 20, is timed well because business ties between the two countries is expected to improve after Prime Minister Narendra Modi’s Japan visit is scheduled for August 31.

Since a pure Japanese scheme is still an unchartered territory for Indian investors, they need to look at a few data points. For instance, its stock market index – Nikkei -225. The index has returned 77% in three years. Among the leading global markets, only Nasdaq, with returns of 92%, has performed better. But over a 10 and 15 year period, it has underperformed most global indices. In fact, over 15 years its returns are a negative 13%.

The Japanese crisis is a well-known story. Since the financial crisis on the 1990s led to fall in property prices and Nikkei is still reach the high of 1989. In December 1989, it hit an all-time high of 38,957. At present, it is at 15,449. Clearly there is a long way to go. From a currency perspective which impacts returns as well, has risen against the in the past year.

Though over 15 years, it has depreciated by over 50%. A falling rupee improves returns of foreign funds for existing investors due to conversion.

Reliance Mutual Fund seems to be betting on improvement in the Japanese economy’s prospects. Says Sundeep Sikka, CEO, Reliance Mutual Fund: “Japan is showing early signs of an economic revival, after more than two decades of deflationary growth, thanks to the coordinated efforts of ‘Abenomics’: aggressive monetary policy, fiscal measures and economic reforms. Investors in the fund could potentially benefit from the revival in Japanese economy.”

In addition, Japan has one of the highest overseas-production ratio. The average is about 20%, some of the top companies in which the fund would invest into, have ratios around 45-50%. Investors are likely to benefit from a possible global recovery. The scheme will be managed from India and invest in 30 companies. Reliance’s partner Nippon will advise on stocks. The expense ratio will be up to 2.5%.

Says Amit Trivedi, financial planner and director of Karmayog Knowledge Academy: “Investors should have exposure in international funds for two reasons: as a portfolio diversification and for children’s education abroad.” Since the latter is goal-based investment, it should not form part of an investment portfolio. According to him, United States from a goal-based perspective, should be the first choice because a lot of people send their children for education.

Other countries should be added to the portfolio later. “Such funds are like which have good potential but one should have restricted exposure in them,” says a financial planner. Financial planners believe that from a perspective, one should start with 5% exposure to international funds and gradually increase it to 15-20% over time and countries.

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Japanese funds should be second choice
Japanese Education – Yahoo News Search Results
Japanese Education – Yahoo News Search Results

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