MUMBAI: Foreign portfolio investors seem to have taken a fancy for equity mutual funds these days, even as their domestic counterparts are reducing exposure to such funds.
Better onshore fund management capabilities of Indian fund managers coupled with high levels of transparency and exposure to quality second-line stocks are prompting international pension funds and insurance pools to invest in domestic equity funds, industry sources said.
According to AMFI data, FII investments in equity funds stood at Rs 1,212 crore over 87 folios at March 31, 2012 against Rs 1,048 crore in September 2011 and Rs 1,027 crore in March 2011. Though the increase in allocation is only marginal, there’s a feeling in industry that this could be just the beginning of large long-only funds giving core investment mandates to Indian fund managers.
Till now, domestic fund houses only provided investment advisory services to large overseas institutional investors. “The number may be very small, but it is significant for the industry in terms of overall value,” said Sundeep Sikka, chief executive of Reliance Mutual Fund. According to Sikka, international investors are seeing value in onshore fund management capabilities of Indian asset managers.
“Several FIIs are investing in mutual funds because they want to derive benefit from second-line stocks that are not a part of any key indices. Domestic mutual funds are able to pick multi-baggers; this is prompting FIIs to look beyond index funds and ETFs,” he said.
The rise in ‘FII-share’ to overall industry AUM will encourage fund houses to promote their funds through the government-proposed direct fund investment route.
The government, in its FY12 budget, allowed foreign retail investors to invest directly in domestic equity mutual funds. According to industry sources, several leading fund houses are negotiating with their international distributors to sell local Indian funds in overseas markets. A few fund houses are also working out ways to prepare ‘wraps’ for US markets.
“We’re talking to a few legal consultants to prepare a US wrap, which will enable us to distribute Indian funds to retail investors in America. We’ve got good operational transparency and reporting standards; we hope to get permission from SEC once we’re ready with the wrap,” said the marketing head of a bank-promoted fund house.