Money managers trying to sell the appeal of global stocks are finding it difficult selling diversification opportunities to Indian investors enamoured by the bull run at home and tax-efficient domestic funds.

Despite more liberal norms and a flurry of new launches, such funds managed only $882 million at the end of September, leaving much of their $5 billion quota underutilised, data from the Association of Mutual Funds in India showed.

People say lot of foreigners are coming into India and investing here...why should I invest out of India, Ajay Bagga, Chief Executive Officer of Lotus India Asset Management, said.

Foreign inflows of about $15.8 billion has helped fuel India's benchmark BSE index rise 35.33 percent in 2007.

With India being one of the most attractive markets on the back of strong fundamentals, the case for international funds becomes difficult to justify to the common investor, Dhruva Raj Chatterji, research analyst with fund tracker Lipper, said.

However the crucial geographical diversification benefit of these funds is reason enough for them to command a marginal allocation, he added.

After years of restricting foreign investment to those with at least 10 percent in a listed local firm, India allowed funds to invest freely in global stocks in February 2006, gradually raising the cap to $5 billion.

AMCs, distributors and investors will take a fair bit of time to get to know the geographical and currency risks associated with foreign investing, said ABN AMRO Asset Management Managing Director Nikhil Johri.

He expects the response for his international fund to be lower than the domestic ones.

If Indian market continues to outperform most other markets then of course this money itself may get redeemed.


If they have been caught on the wrong side of the current sentiment, the tax regulations do not help either.

Indian regulations classify funds investing more than 35 percent of assets in foreign equities as debt funds and subject to higher taxes, making them unattractive.

Many fund firms have restricted foreign stock exposure to 35 percent of the assets, said Lipper's Chatterji.

Investments in them attract long-term capital gains tax of 10 percent after a year, which domestic equity funds do not pay. Short-term gains tax can go up to 30 percent, while it is only 10 percent for equity funds. Investors also pay surcharge and cess.

Raising the cap alone is not enough, but they also have to change the tax rules, said Sanjay Santhanam, vice president at Sundaram BNP Paribas Asset Management Co.

Sundaram's new global advantage fund collected 3.2 billion rupees in July and is one of its smallest equity funds.

Half of India's 12 international funds mainly focus on India, with partial allocation to international equities, said Lipper's Chatterji.