China Equity Mutual Funds – Which one is right for you?

Edelweiss Greater China Equity Offshore Fund or Axis Greater China Equity Fund of Fund. If that is question in your mind, let’s make an attempt to answer which of China Equity Mutual funds is right for you.

One reason for investing in mutual fund is diversification. We can start with small amount like 500 rupees. Mutual funds allow us to invest in large basket of stocks. International Mutual funds invest in stocks outside India.

This helps us do geographical diversification.

US and China are currently number 1 and 2 economies. Some believe China economy will overtake US in couple of decades. So we can consider investing in these two countries from diversification / hedging perspective.

In this article, we will see mutual funds available in India for investing in China. Let us see what are similarities, differences and which one we should go with.

Which Equity Mutual Funds invest in China companies?

At the time of review, we have below options to chose from

  • Edelweiss Greater China Equity Offshore Fund
  • Axis Greater China Equity Fund of Fund

Let us look at these and see where they are similar and different. Hope this will help you chose right one for you.

How these China Equity Mutual Funds stack against each other.

Lets start with basics. Note that these both China centric Equity Mutual funds are actually fund of funds. What that means is they themselves do not invest directly in Chinese stocks. They take mutual fund route themselves.

Edelweiss Fund invests in J P Morgan Greater China Fund which then invests in China specific stocks.

Axis fund invests in Schroder International Selection Fund – Greater China.

So performance of our both funds depends on underlying funds.

Equity allocation

Both these funds will be generally fully invested in respective funds except for parking some money for possible redemption. Underlying funds themselves would have some cash component for same redemption pressure.

So you should be aware around 85% is in stock and rest will be in cash.

Geographical spread

Those who are politically aware on China would know China considers Taiwan and Hong Kong as part of itself. Both the funds also invest in companies of these three regions. That is why we see Greater China in names.

Portfolio comparison

On face of it, both funds have 1 underlying mutual fund in their portfolio. However ultimately stocks in that underlying fund will drive our returns. So lets look into them one by one.

Edelweiss fund focuses on portfolio of companies in Greater China with High ROE (Return on Equity) and Low on debt. See image below for top holdings.

courtesy morningstar

It is sort of high conviction portfolio. What I mean is it will invest large amount in stocks that it is positive on.

As of writing this article, top three stocks – Taiwan Semiconductor, Tencent Holdings and Alibaba group each have almost 9 to 10% of overall portfolio. So three stocks almost covering 28% of overall investment.

This type of portfolio is high risk-high return type. When selection comes right, investors will be rewarded but if any of the stock does poorly, impact would be high too.

Now lets see portfolio for underlying Axis fund.

courtesy morningstar.uk

Top three companies are same but those are not as concentrated as Edelweiss one. Rest of the companies don’t have much in common in both portfolio.

Also note that though these are Chinese stocks, its not direct investment in China stock market. As per my research, these are Chinese companies / stocks which are listed in US stock market.

Style of Investment

Edelweiss one is more growth oriented (39%) vs Axis one (29%). Most of stocks are blend of Growth and value. None of these funds have more than 10% of stocks in Value based style.

If we see historic data for underlying funds, they are always invested in stocks for more than 90% of assets. Edelweiss has been large cap dominated on where as Axis one was blend of Large and Mid cap till last few years and now that too is large cap oriented fund.

Performance

Edelweiss fund was launched in 2009 and have given more than 15% returns in last 12 years. 10 year returns are 16.5% plus. This is great return along with getting hedge as well. Axis fund is new kid in block so we will need to assess its performance little differently.

We will need assess performance of fund of funds based on underlying funds. Thankfully both underlying have long track records (10 plus years).

Overall, its mixed bag here. Edelweiss underlying fund performed overall 1% better if we consider 10 year period. In short term, it has performed still better.

During 2018 however, it gave negative returns of -19% vs around -6% for Axis underlying fund. So its more volatile than Axis one.

Volatility and other risk parameters

If we check standard deviation of underlying funds for three years, then its 18.32 for Edelweiss vs 16.41 for axis one. As expected Edelweiss one shows more volatility. So you will need to be ready for more ups and downs for better returns.

Sharpe ratio for Edelweiss underlying fund is 1.04 vs 0.90 for Axis one. So Edelweiss one has better risk adjusted returns overall.

Expense ratios

This is one common problem with fund of funds. Investors end up paying expense ratios of funds they invest in as well as underlying fund. In this case however there is no Indian Mutual Fund taking direct route to Chinese stocks.

No real difference in underlying funds. Both underlying funds seem to have around 1.5% of investment fees.

However Edelweiss charges around 1.43% just to manage investment in underlying fund whereas axis one is just 0.35% at time of writing.

These are for direct plans. Regular plan will have even more expenses. I think such fee is too high for a fund which just manages currency conversion and invest in underlying fund. Hope someone at Edelweiss is reading.

Also read – How to Invest in direct plans of Mutual funds using kuvera.

Exit Load

Both funds charges 1% exit load if redeemed within 12 months of investing.

Conclusion

Overall if I were to chose between available China Equity Mutual Funds, I would go for Edelweiss Greater China Equity Offshore Fund for better risk adjusted returns. However investor needs to be aware of concentrated calls fund takes at times and be ready for some volatility. Also J P Morgan has better reputation and process controls for my liking.

If investor is okay for a little less but prefers less volatility, then Axis Greater China Equity Fund of Fund is not bad too. Don’t think Axis fund is very new. Ultimately what matters in such fund of funds is characteristic of underlying fund. Underlying fund has long track record and a descent one.

Also low expense ratio will start showing effect over long run and that 1% saving compared to Edelweiss fund may make it equally competent as other.

Unfortunately its not a case of clear winner. According to me both would be equally good for exposure to Chinese stocks.

Hope this article helped you to get some insight and make a decision. Let me know in comments which of these China Equity Mutual Funds you prefer and why.

Do let me know If anything else you were looking to be covered. Any other China fund you would like to add for comparison.

Some questions you may have on international funds

Why we need geographical diversification?

This approach acts as hedge against local geographical issues. Say war like situation between India and Pakistan will take Indian stock market down drastically. It may not impact US and China stocks that much.

Same with political instability or issues with Indian rupee/economy may have significant impact on Indian stock market but may not impact US or China economy.

It is good practice to invest outside our own country which can act as hedge for us.

Why only US and China and not other countries?

India itself is developing country. So investing in another developing country like say Brazil may just be too much of diversification and will not give lot of benefits.

US is number one economy in world. China is expected to rise there in couple of decades. So investing in them has benefits of economical stability and growth.

Plus their respective currencies may strengthen compared to Indian rupee. That will also help in overall returns for us.

What is exactly currency risk in International Funds

When you invest in Indian stock market (directly or via mutual funds), you buy and sell in Indian rupee. So currency fluctuation do not directly impact your investments.

In case of international investment, actual investment happens in respective currencies. Let us try to understand with simple example.

When you want to invest in US stocks/Mutual fund, you will buy using Indian Rupee. Let us say you invest 1Lac rupee. This amount will be converted into USD as per current exchange rate say 72 rupee = 1 USD. So you will buy stocks / MF worth of say 1,389 USD (1 Lac divided by 72).

Now when you sell or redeem investment, then reverse would happen. Money would get converted from USD to INR and credited to your account. In long term, there are two possibilities. Indian rupee appreciates or depreciates.

Let us say your investment grows from 1,389 to 3,000 USD as per valuation of underlying stocks in US. Without currency factor, you would get 3,000 multiplied by 72 = 2,16,000 Indian rupees. But this is not reality.

There are two practical scenarios. INR appreciates or becomes strong and instead of 72, say 1 USD becomes equal to 60 INR. In this case, you will get 3,000 multiplied by 60 which is 1,80,000 rupees. This is less than 2,16,000. This is called as currency risk.

In opposite scenario, INR may depreciate. Say 1 USD becomes 80 INR when you sell the units. In this case, you will get 3,000 multiplied by 80 which is equal to 2,40,000. This is more than 2,16,000. This is what has contributed to better returns in US mutual funds in last decade.

It is difficult to predict currency valuation in long term. So International Funds also suffer from currency risk.

Why invest in China via Mutual Fund route

China as a country and economy not as open as US. At the time of article, I have not seen any easy option to buy stocks in China directly for retail investors.

Also we need to apply same logic of diversification as we consider during Indian stock market investment. Mutual Funds offer us to invest in basket of China specific stocks with some amount and SIP route.

How much to invest in International Funds

Although you should do your risk profiling and check with your financial advisor, I feel generally 10-15% of your equity allocation could be reasonable to take International exposure.

This is mainly from hedging perspective and not really for additional returns.

Taxation for China / US / International Funds

Tax benefits are available to Equity mutual funds investing only in Indian companies and not certainly China. Naturally our government wants to promote Indian industries.

So these mutual funds will be treated like debt fund for taxation purpose. You will need to hold them for 3 years to get benefit of Indexation and long term capital gains.

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