I recently wrote about the Hang Seng BeEs ETF, which will give Indian investors a chance to invest in Hong Kong equities, and shortly after-wards, I came across the HSBC Brazil Equity Fund, which is an open ended fund of fund schemes that targets Brazil.
Brazil based funds came into focus some time ago, when Brazil won the bid for hosting the 2016 Olympics, and at that time I had compiled a list of Brazil ETFs available for American investors. As far as I know, currently there are no funds in India that target Brazil.
HSBC Brazil Equity Fund
Even HSBC Mutual Fund has just filed the draft prospectus with SEBI and so far they haven’t declared the date that this fund offer will open on. The HSBC Brazil Equity Fund is a fund of funds scheme, which means it will invest in other mutual funds, and in this case – it will primarily invest in the units of HGIF Brazil Equity Fund.
Here is how the indicative allocation of HSBC Brazil Equity Fund looks like:
| Instruments | Minimum Allocation % | Maximum Allocation % |
|
Units / Shares of HGIF Brazil Equity Fund or other similar overseas funds |
80 |
100 |
|
Money Market Instruments |
0 |
20 |
As regular readers of this blog will know there is no entry load for the fund, but there is an exit load of 1% if the units are redeemed or switched within 1 year from the date of investment.
There will be growth and dividend option for this fund, and the minimum application amount will be Rs.10,000.
The fund will primarily be invested in equities so you are exposed to market volatility and possible loss of capital like any other equity fund.
Since HSBC Brazil Equity fund is an international fund, you will also be exposed to currency risk in addition to the usual risks associated with equity. This is because the base currency will be the Indian Rupee, while the fund will be denominated in foreign currencies like the US Dollar. So any exchange rate movement between these currencies will impact your returns.
Expenses of the HSBC Brazil Equity Fund
The HSBC Brazil Equity Fund will have an expense ratio of 0.75% of its own, and then it will also indirectly bear the expenses of the HSBC GIF Brazil Equity Fund. Their expenses are classified into Management & Distribution Expenses and Operating Expenses.
The Management & Distribution Expenses for a retail class share is 1.75% and for an institutional class share is 0.875%. In addition to this, they charge 1% for administrative, operating and servicing expenses.
It is not clear to me whether the shares bought will come under the retail category or not, but considering the higher side of the expenses, the total expense ratio comes out to be: 0.75% + 1.75% + 1% = 3.5%.
Insurance Cover with the HSBC Brazil Equity Fund SIP Plus
Now, here is a novel thing. There is a SIP Plus plan that offers insurance cover to the first holder at no additional cost.
Here is what the prospectus says about the Insurance plan:
Eligible transactions
The following transactions during the specified period are eligible for the insurance cover under HSBC SIP Plus. Specified period means the period during which HSBC SIP Plus is open to investors.Any SIP transaction for a minimum of Rs.2000 per month in eligible schemes and a minimum tenure of 36 months. Other options on tenure are 48 months and 60 months.
Any STP transaction for a minimum of Rs.2000 per month in to eligible schemes and a minimum tenure of 36 months. Other options on tenure are 48 months and 60 months.
Insurance cover
The amount of insurance cover will be computed as follows: –For each eligible SIP transaction, cover is equal to tenure multiplied by installment
For each eligible STP transaction, cover is equal to tenure multiplied by installment
Details of insurance cover
Under HSBC SIP Plus, the eligible investors will be entitled to Critical Illness Cover provided by ICICI Lombard General Insurance Company Limited (‘IL’) subject to the terms & conditions detailed below. The Critical Illness Cover provided by IL will be under the Master Policy for the Group Term Insurance to be entered into between IL and the AMC. A copy of the Master Policy would be available for inspection at the registered office of the AMC. The AMC reserves the right to withdraw / modify HSBC SIP Plus proposition at its discretion.
This is interesting, and it will be interesting to note how many people find the insurance cover attractive enough to go for longer SIP plans.
In summary, I think you need to keep these three things in mind while evaluating the fund:
- Equity focused on Brazil (duh)
- Relatively high expenses
- Insurance cover (that you may or may not need)
Disclaimer: This is just a summary of the features of this mutual fund, and is not a buy or sell recommendation.
Well, I would beg to differ on that..
The primary difference between India and Brazil would be the net commodity export/import positions.
Brazil has huge oil reserves and is a net exporter for oil as well as a number of important commodities like metals, agri products, etc.
In a hyper-inflationary world (esp. Oil), Brazil would benefit from the price increases while India could have a big problem.
Another reason would be diversification between governments and corruption. Its a question of sensibly diversifying unknown risks that exist due to various political factors while keeping the return profile almost same.
Last but definitely not the least, Brazil has a lower valuation relative to India.
All in all, it can be good value-added diversification for your portfolio.
But then, you also have to develop a level of understanding for a whole new country and economy, its major players, ethics, etc..
Those are all fair points Parth, but when I look at how BOVESPA and Sensex have behaved in the last few years – they have mirrored each other quite closely. So, if I was looking for diversification by buying an international fund I think Brazil may not help in that much. If on the other hand – I want to take a bet on Brazil specifically, then yeah you need a fund. Which is what I meant earlier – most people look abroad for diversification, but that may not work out too well for Indians investing in other emerging markets.
There aren’t any ETFs that trade Aus are there? I think that’s a good play if you want to go into an international index which benefits from commodity prices.
Hi Manshu,
The fund cannot even be called a pure FoF, it is more like an investment facilitating vehicle for the HSBC GIF Brazil Equity Fund, as its going to invest 95-100% in the fund.
Meanwhile, the past performance of the base fund does not inspire much confidence as it has underperformed the Brazilian market by quite a bit. Plus the high fees that you mentioned.
All in all, I would wait for similar offerings that are bound to come from other companies as well.
Regards,
Parth
Hi Parth – thanks for your comments – what you say makes sense and I would also recommend checking the thesis on why an Indian investor should invest in another BRIC country? I mean what is the additional benefit – you are getting the same type of returns here and in fact the same type of risks as well, so why go for another emerging market fund?
Brazil gave awesome returns in last 10 years more than India.
A mutual fund looks good for diversification..
Its good that we now have oppurtunities to invest, which can provide geographical diversification (Brazil F-O-F here, and HangSeng ETF from benchmark). Also read that the Nifty is listed now on the chicago exchange, so truly we are now merging onto the global economy.
Specifically on the topic above, value add from my side is
a) I would go for this if i strongly felt the need for diversification within the BRIC economies. As of now i apart from China (which is on a positive because for tremedous growth – stimulus package continuing – ) i have not seen conclusive data if the other economies provide a corelation with Indian securities which will justify the move.
b) the insurance offered is a general insurance and not a life insurance cover. Critical Illness covers provide for compensation on detection of the notified critical illnesses AND “Survival” of the assured for a certain period (approx 30 days) after the detection of the illness. So Firstly, Its not Life Insurance cover and Secondly, need to survive some period before you can file a claim.
Thanks aton for this information. 🙂
Hi,
I have a question.
How can I find “Expenses of the fund” for any mutual fund. Is it in offer document?
Yes it is present in the offer document, and most of the time you can find it on the website somewhere – Statement of Additional Information or Key Information Memorandum…..one of those documents will have it. Just search for “expense” in the document and you will find it.