How Aditya Birla Sun Life MF, one of India’s first global Gift City funds, works

The fund is a close-ended Category II alternative investment fund or AIF. It has a term of 4.5 years, which can be extended by another year with the consent of two-thirds of its investors. It will feed into the ARGA Emerging Market Equity Fund. ARGA is a US- based asset manager with about $15 billion worth of assets globally. 

The underlying fund actively picks 35-80 companies in emerging markets. It is mostly exposed to China, South Korea, Taiwan, and Brazil. Its major holdings are TSMC, Gree, SK Hynix, Alibaba, and Samsung. In terms of sectors, it is dominated by financial services, consumer discretionary, and technology. 

The ABSL Emerging Market Equity fund has a graded expense ratio for investors depending on how much they invest. For the direct plan variant (Class B1) at the lowest ticket size, this comes to 1.25%. 

The expense ratio reduces for higher ticket sizes as per a defined slab rate. The underlying fund has delivered returns (net of withholding taxes and fees) of 10.5% in the past year, 4.2% in the past three years and 7.1% in the past five years (as of April 2024). 

These are returns in US dollars. It has beaten the MSCI Emerging Markets Index (Net) over all these periods. As for the ABSL Emerging Equity Fund, it is up 10.65% over the past six months and 5.67% since inception on 6 September 2023. 

“Valuation for emerging markets as a whole looks attractive, with Brazil and China being significantly cheaper than advanced economies like the US,” said A. Balasubramanian, managing director & CEO, Aditya Birla Sun Life AMC.

“A higher degree of individual investor participation, lower availability of sell-side research and other demographic factors have contributed to greater inefficiencies and volatility in emerging markets offering high scope for growth,” he said.

Improving quality and corporate governance in emerging market companies and greater depth of financial markets are further aiding the case of investing in emerging markets. “Our fund encourages investors to take a leap and strengthen their portfolio by investing in attractive emerging markets, at a discount.” 

“The fund also offers opportunity to capitalise favourable exchange rate movements apart from generating returns through its investments. The economic conditions are ripe for investors to go global, and we are here to provide them with our support in this journey.”

Tax benefits

The term of the ABSL Global Emerging Markets Equity Fund has been carefully chosen. After three years, gains in the fund will be taxed as long-term capital gains (LTCG) for Indian residents. This implies a tax rate of 20%, and investors will benefit from indexation as well. Since this will act as a feeder fund with a ‘buy and hold’ strategy, any churn in stocks in the underlying fund will not generate taxation for investors. 

For NRIs, there will be no tax in Gift City or India. However, they may be taxed on gains in their home countries. For resident Indians, the benefit of global diversification is coupled with a 20% tax with indexation after a three-year holding period. 

In contrast, regular feeder mutual funds investing overseas (called FoFs) are taxed at a slab rate regardless of the hounding period (after Budget 2023).

Ease of Investment

One of the big benefits of Gift City for NRIs is the simpler paperwork involved. Since Gift City is considered to be a jurisdiction outside India, the complex forex rules around NRO, NRE, and PIS accounts do not apply. Furthermore, the fund is denominated in the US dollar. Hence, NRIs can directly remit money to it from their foreign bank accounts in US dollar without converting to Indian rupee. Corporates can also remit up to 50% of their net worth under RBI’s overseas portfolio investment or OPI norms.

Is round-tripping a concern?

Generally, investments abroad that, in turn, invest in India do open up the risk of running afoul of round-tripping regulations in India. However, this may not be a major concern here. 

The underlying fund has historically invested 5-15% of its assets in India. However, since this is a relatively small proportion and it is a managed pooled vehicle with many investors, it may not attract any action related to round tripping, according to a senior industry executive who declined to be named.

Disadvantages

On the flip side, the fund’s close-ended structure means that investors cannot wait out a bad period. The emerging markets mandate may not mean much diversification from India. Past returns do not compare favourably to those delivered by the Indian market. 

The AIF also has a high ticket size ($150,000). Remitting money to it from India attracts a 20% tax collected at source. This can be adjusted against other taxes payable or claimed in your income tax return as a refund. However, it does present the investor with a cash-flow drain in the short term.

The ABSL Fund is a niche bet for the select few who want to take on a high level of risk. But what’s important to note is that it is an early version of many such products that may spring up in Gift City. Investors should keep an eye out for them.