It is now a given that your portfolio needs international diversification. Access to global markets, some of the best, unique and innovative companies, benefit from INR depreciation and future funding of foreign currency goals are the key reasons.
In an April note on Motilal Oswal S&P 500 Index Fund, we already covered in a lot of detail these benefits including an overview of the offerings in the international category as also an outlook of the S&P 500 based fund. Check it out here.
Today, we are looking at one of the earlier offerings in the space – Franklin India Feeder US Opportunities – Feeder Fund.
Structure of the fund
This is an open ended, fund of fund investing in the units of the fund – Franklin US Opportunities Fund.
Mechanism of investment process for Resident Indians is as follows:
Source: FT
All the investments in the India Fund feeds into the Franklin US Opportunities Fund (a USD 4.47 billion fund), which then aims to invest in leading growth companies across industries and market-capitalisation.
Please note that the Franklin US Opportunities Fund is an actively managed, multi cap fund. It benchmarks itself to the Russell 3000 Fund, which is a broad market index in the US (much like Nifty 500 in India).
The investment objective of the fund is specified as:
The Fund aims to achieve capital appreciation by investing principally in equity securities of US companies believed to possess sustainable growth characteristics and which meet growth, quality and valuation criteria. These include small, medium, and large capitalization companies with strong growth potential across a wide range of sectors that have exceptional growth potential and fast growing, innovative companies within these sectors.
Strategy – Portfolio Construction
The fund follows a growth focused, market cap agnostic approach to stock selection. The portfolio as on March 31, 2020 accounts for 87 stock holdings.
Source: Fund Factsheet as on March 31, 2020
In terms of sectoral breakup, Technology and Healthcare get the maximum allocation.
Performance and Peer Comparison
As is known of international funds, the fund returns are a mix of USD-INR depreciation (around 4% every year) + the returns from the portfolio companies.
Franklin India Feeder US Opp Fund performance as on June 10, 2020 is as follows.
Source: ValueResearch
In terms of peers, there are several funds available for International US Focused Investments. Motilal Oswal Nasdaq 100 ETF (index ETF based on Nasdaq 100) has existed for a similar period as the Franklin Fund. One of the other popular options has been the ICICI Pru US Bluechip Equity (an actively managed fund).
Over the last 3 years, this is how the NAV movement of these funds looks like. See below.
Motilal Oswal Nasdaq is the orange line (at the top), followed by Franklin India Feeder fund and then the ICICI Pru US Bluechip.
Source: ValueResearch
Nasdaq 100 is a non financial companies (mostly tech dominated) index of 100 companies. It has a high concentration risk but also represents one of the most rewarding sectors of the world.
Over a longer duration, Nasdaq 100 (as an index and as the fund offering in India) has done far better than any other international fund.
Costs and Taxes
The Franklin Feeder Fund in India (in which you invest) currently carries an annualised expense ratio of 0.61%. This has been coming down over time. A couple of years ago it was close to 1%.
One can argue about 2 layers of cost on the fund – one for the India fund and the other US Opportunities fund. But that is the structure and Franklin is not going to change it.
From a tax point of view, the Resident Indian investor has to pay long term capital gains tax of 12.5% after 2 years of holding. (Tax change as of July 23, 2024).
So, who should invest?
Franklin India Feeder US Opportunities fund represents a multi cap, diversified portfolio. For a moderate risk inclined investor looking to diversify across international markets, this fund can be a good choice.
However, the recent launch of Motilal Oswal S&P 500 index fund provides a compelling alternative to invest in the largest 500 companies in the US.
More aggressive investors can evaluate Motilal Oswal Nasdaq 100 ETF or fund of fund.
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