Global Diversification – Is it Worth?

Hi Asav,
I saw that Mirae AMC has launched India's first China fund namely "MIRAE ASSET CHINA ADVANTAGE FUND". The offer document cites that China is better poised than India in its economic growth and will be the next superpower. Do you think one should invest in funds such as this, as on positive sides, this will add exposure to International markets to my portfolio, but that would also bring some foreign exchange volatility.
Kindly guide the readers here, as many more funds based on developing countries (BRIC) may soon be on plate of other AMC's.
Thanks,
Anubhav

Really nice question. In fact, many of my friends ask me the same question again and again. Now, let me tell you the Incidence of one of my over enthusiastic mutual fund Investor friend. And you will understand whole the matter.

My this friend love the word “Diversification”. Because when it comes to investing, he loves to play on the safe side. He only invests in mutual funds. Now, let me tell you something about his Collection… I am sorry….Sleep of tongue…I mean to say Portfolio…!!!!

My this mutual fund lover friend has build a portfolio of 100 Odd mutual Funds….!!!!

He has collected all these funds in the name of Diversification and Optimal Return. Every time a new fund launches in the market, he adds this fund into his collection (Sorry Portfolio) at the name of diversification. He has Equity Diversified, Banking, Power, Index, Global Funds which invest in global economy, Pharma, FMCG and many other varieties of fund.

Now just think that, each mutual fund contains the portfolio of 30-150 stocks in it. Now, if you collect 100 odd mutual funds including global funds which invest in world economy than what will Happen?

Well, This will Happen – Now, Every Single Stock in this world is in your Portfolio via those Mutual funds at the name of Diversification….!!!!

So Now every stock in this world is in your portfolio – What does this mean to an Intelligent Investor? Well It means Average return from your portfolio. Because you have added every stock in this world in your portfolio.

And Portfolio is all about Maximizing return of your wealth and not to going towards average. If you want to achieve just average return than, why not buy only 1 Index fund rather than buying 100 odd mutual funds? Investing only in 1 Index fund will give you average returns as that of Sensex. No need to collect 100 funds at all.

Now, let’s back to your query. According to the brochure, China economy is better than India. Well, I agree with it. But just tell me that, How much money you have to invest? Few Lakhs, Few Crores or even few Hundred Crores?….. Not more than this right?

Now, unless you have few thousand crores in your portfolio, you should not care about diversifying it global. Because there is already huge capacity in the Indian market that can diversify up to few thousand crores in India only sufficiently.

So forget about the concept of Global Diversification and Global Funds. You not at all need to invest in such funds unless you have 2-3 thousand crore rupees to invest…!!!