Geographical Classification – Domestic & Offshore Funds

Introduction

In today's interconnected global economy, investors are not limited to investing only in their home country. Mutual funds allow investors to diversify geographically, reducing "Home Country Bias" and capturing growth opportunities in other economies. Based on the geographic focus of investment, funds are classified into Domestic Funds and Offshore/International Funds.

1. Domestic Mutual Funds

Definition: A Domestic Mutual Fund mobilizes savings from investors within the country and invests the pooled capital exclusively in securities (equity or debt) of the same country.

Features:

• Focus: 100% investment in Indian stocks and bonds (for an Indian fund).
• Regulation: Regulated purely by SEBI.
• Primary Objective: To capture the growth of the domestic economy.
• Currency Risk: Zero. Investors invest in Rupees and get returns in Rupees.

Example:

• A standard "SBI Bluechip Fund" collects money from Indian investors and buys shares of Reliance, Infosys, and HDFC Bank listed on NSE/BSE.

2. Offshore / International Mutual Funds

Definition: These are funds that facilitate cross-border investments. They can be broadly categorized into two types based on the flow of money:

Type A: Funds Investing Abroad (International/Global Funds)

• Definition: These funds collect money from Indian investors and invest in foreign companies (e.g., Apple, Microsoft, Amazon) listed on global stock exchanges (like NASDAQ, NYSE, LSE).
• Objective: To give Indian investors exposure to global giants and developed markets.
• Benefit: Diversification. Often, when the Indian market falls, the US market might rise (low correlation).
• Risk:
  • Currency Risk: If the Rupee strengthens against the Dollar, the returns fall. If the Rupee weakens (depreciates), returns increase.
  • Geopolitical Risk: Political instability in the target country affecting markets.

Type B: Funds for Foreign Investors (FII Funds)

• Definition: These are funds domiciled abroad (say, in Mauritius or Singapore) that collect money from foreign investors to invest in Indian markets.
• Example: "India Opportunities Fund" launched in New York for US investors who want to invest in the Indian growth story.

3. Sub-Types of International Funds

1. Global Funds: Invest in companies across the world (e.g., "Global Equity Fund" investing in US, Europe, and Asia).
2. Country-Specific Funds: Invest in a specific country (e.g., "US Equity Fund," "China Fund," "Brazil Fund").
3. Thematic Global Funds: Invest in a global sector (e.g., "World Gold Fund" investing in gold mining companies globally, or "Global Tech Fund").

Comparison: Domestic vs International Funds

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Exam Notes: Writing the Answer

Question: "What are Offshore Mutual Funds? How do they differ from Domestic Funds?" (10 Marks)

Model Answer:

Domestic Funds:

• Mobilize resources from domestic savers.
• Invest exclusively in the domestic capital market (Indian securities).
• Regulated by the home country regulator (SEBI).
• No currency risk involved.

Offshore Funds:

• Facilitate cross-border investment flows.
• Type 1: Indian investors investing in foreign markets (e.g., US Equity Fund). Allows diversification and exposure to global brands.
• Type 2: Foreign investors investing in India.
• Currency Risk: Returns are impacted by exchange rate fluctuations (e.g., USD-INR rate).
• Taxation: International funds held by Indian investors are typically taxed as debt funds, not equity funds.

Conclusion: Geographical classification helps investors mitigate "country-specific risk" by diversifying their portfolio across different economies.

Summary

• Domestic: Invest within India. No currency risk. Standard equity taxation.
• Offshore: Invest outside India (or bring foreign money in).
• Diversification: Key benefit of international funds is low correlation with Indian markets.
• Currency Impact: A falling Rupee boosts returns for international fund investors; a rising Rupee hurts returns.

Quiz Time! 🎯

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