The sole Indian mutual fund dedicated to investing in the Chinese market has compounded at nearly twice the rate of the S&P BSE 500 index over the past 10 years. Edelweiss Greater China Equity Offshore Fund has delivered a compounded annualized return of 14.17% compared with 7.76% for BSE 500. The ₹220-crore fund compares to the ₹6.3 lakh crore invested in the India-focused equity mutual funds, suggesting that an India-only investment approach may not have paid off.
A few other Indian mutual funds invest in the broader East Asian region, including China. These are Franklin Asian Equity Fund and HSBC Asia Pacific (ex-Japan) Dividend Yield Fund. The former has delivered 9.08% over the past decade, once again beating the Indian market. The latter was launched in 2014, and has delivered 7.41% over the past five years, once again higher than 5.41% given by BSE 500 in the same period.
The Edelweiss’ fund feeds into JP Morgan Greater China Fund. It is benchmarked to the MSCI Golden Dragon Index. The fund invests in China, Hong Kong and Taiwan, although the bulk of its investments are in the People’s Republic of China (71% of the portfolio).
Its top four holdings are Alibaba, Tencent, Taiwan Semiconductor and Ping An Insurance.
International mutual funds are taxed like debt funds. Capital gains in them are added to your slab rate for a holding period of less than three years. For longer holding periods, you are taxed at 20% but given the benefit of indexation.
There is no maximum limit for investing in international mutual funds of India-based asset management companies (AMCs), which are regulated by the Securities and Exchange Board of India (Sebi).
You should, however, note that in the past year, and particularly the past three months, the covid-19 pandemic has played an enormous role in the divergence between the fund and its domestic peers. The Edelweiss’ fund has risen 48.2% over the past year compared with a 13.3% decline in BSE 500.
Experts have suggested caution despite the high returns. "HNIs should invest 5-10% of their portfolio in international funds. However, I would recommend the US markets such as S&P 500 or Nasdaq over China. This is because both India and China are developing countries and investing in the other would not offer real diversification. A developed market such as the US is a better bet," said Anant Ladha, a Kota-based mutual fund distributor.
However, according to Kirtan Shah, chief financial planner, Sykes and Ray Equities (I), Indian investors should leave patriotism to one side and focus on the investment case.
“An Indian boycott does not change anything for China since India is less than 3% of China's exports. Unless big economies such as the US or Japan join a boycott, the investment case for China does not get impaired much," said Shah.