The consensus is that by the end of 2022, interest rates will jump by 2.5-3% in a series of further interest rate hikes. The dollar has gained great strength due to this development and is attracting a substantial flow of capital from other geographies and currencies. Risky assets have experienced punishment in the form of ‘risk-off’ as investors look to move to the safer dollar and US treasuries, and asignificant sell-off in equity markets and currencies has been witnessed.

Investors who want incremental US exposure are at sea. Though Sebi has allowed overseas investment through the mutual fund (MF) route, it has maintained the February 1 overall investment limit of $7 billion. Many MFs are continuing with the ban on fresh investments. For instance, Motilal Oswal MF continues to prohibit fresh investment in its five international schemes. In a note to investors, it said that it has not seen any major redemptions in the past few months since these restrictions were applied, resulting in no additional room for accepting fresh investment in any of the international funds.

Many investors are continuing to invest through the overseas exchangetraded fund (ETF) route. ETFs generally deliver market performance at a reasonably lower cost in normal market conditions. However, a key factor often ignored while investing in ETFs is the premium or discount to the net asset value (NAV). This happens when ‘normal’ conditions are replaced with ‘fast’ market conditions or other external factors (such as breaching of Sebi limits).

While ETF traders are mindful of how to play premiums or discounts, investors need to be aware that ETF is not as simple as a low-cost MF. ETF prices can be distorted from the underling NAV. The other matter of concern is the tracking error — the difference between the performance of the ETF and the index it tracks.

Many funds investing in ETFs face this challenge because of the cash they hold. If not invested in a timely manner, it becomes a reason for the tracking error, or cash drag. Also, the indices that ETFs track undergo a periodic rebalancing, in which some stocks are added to, and some removed from the index. This rebalancing adds to the ETF’s additional cost, which adds to tracking errors.

Fortunately, there is an alternative. RBI allows individuals to remit up to $250,000 a year under the liberalised remittance scheme (LRS) for various purposes, including investments.

Boutique fund managers run niche investment strategies with a focused approach and well-defined investment criteria. These strategies are usually characterised by a concentrated portfolio of companies that have a high return on equity (RoE), no or little leverage, consistent growth in profitability and generate high free cash flow.

LRS limits can be used to invest in such strategies that offer investors active management, a quality investment portfolio and little chance of leakage of returns due to discounts or tracking errors. Moreover, investors can plan to use LRS limits for investment throughout the year by staggering the investment in monthly remittances, which can create the impact of dollar-cost averaging. One can use LRS to remit a fixed sum, around $10,000 every month, to create asystematic investment mode that helps in overriding the exchange rate volatility along with the opportunity to invest at different market levels, giving a better averaging of investment at cost.

Investors need to be cognisant of two things — costs and size. While ETF costs are at 0.5-1.0%, boutique investment firms come with fund management fees of 1-2%. Also, investors with small ticket sizes may prefer the ETF route, as specialised fund managers may not accept small investment sizes, or it may be an expensive proposition.

Also, smaller LRS transfers are unviable due to attached forex costs. So, in a nutshell, using the LRS route gives advantages on three fronts:

It creates a dollar asset that can be used for any future dollar expenses towards education, healthcare and travel.

One can use some niche strategies to make benchmark-beating returns.

It offers the benefit of staggered investments like a systematic investment plan (SIP) that helps in volatile times.

Efficient investing is risk management. By managing the risk of downsized returns attributed to tracking errors, one would help the portfolio to do well.

Adblock test (Why?)

Source link