Get to know Foreign Investment Fund

By: Nipapan Poonsatiansup, CFP® Dependent Financial Planner

For this article, We will take you to know foreign investment through foreign mutual funds. Foreign Investment Fund or FIF is a mutual fund focused on investing in foreign securities, not less than 80% of the net asset value. SEC requires the fund to invest in countries with regulatory bodies that are ordinary members of IOSCO or in countries where the stock exchange is a member of the World Stock Exchange Organization (WFE). To be able to trust that the stock exchange and the securities that investors invest in will receive good governance at the international standard level.         

At present, FIF mutual funds in Thailand are divided into 2 main types:

1.        In which the Thai Asset Management Fund manages itself 

In which the Thai Asset Management Fund manages itself by investing money in various securities or financial products abroad. Whether stocks, debt securities, futures contracts with returns based on various variables such as reference to securities prices or stock price index,
product prices or commodity price indices such as gold prices or crude oil prices, etc. But still does not cover direct investment in many other types of products such as gold and oil commodities. Examples of this type of foreign mutual funds that are offered for sale and are popular, such as FIF mutual funds that invest in South Korean bonds

2.     The type that Thai asset management company buy the mutual fund managed by another foreign fund manager. Or it is an indirect investment through foreign funds in that country which can be invested in 2 ways:

2.1  Fund of Funds is to buy various mutual funds in the foreign countries which may have similar investment policies or different policies.
By which Thai Asset Management Corporation will determine which funds to invest in, in what proportion and will be able to adjust the investment as appropriate under the criteria specified by the SEC.

2.2 Feeder Fund is the investment in only one foreign fund, called the Master Fund. Such as FIF X mutual funds to invest in a single Y fund established in a foreign country. In which the Fund Y will have a fund manager who is overseeing and managing money. Which may invest in other mutual funds or financial products according to the specified investment policy. Examples of Thai Feeder Funds such as FIF mutual funds that invest in mutual funds in foreign countries that have policies to invest in gold bullion etc.

Since the FIF mutual fund will have to raise money to invest in foreign countries, the fund manager will have more work searching and analyzing data to decide which securities or instruments are available in the markets of various countries which is a difficult task and challenging the fund manager's ability. If the fund management company does not have a network or partner in foreign countries to send analytical information, instead of FIF funds, will choose securities for their own investment, some funds may choose to invest in foreign funds with expertise and invest in instruments that match the fund's policy. Which will save a lot of time for fund managers and to make use of what is already available?

In terms of management fees, if investing through overseas funds, there will be a 2-tier fee. Is the management fee of Thai Asset Management Company that issued the fund and management fees of foreign funds invested by the Asset Management Company? Thus, the management fees of foreign mutual funds will be higher. Therefore, investors must study and compare various expenses before investing

 How are FIF mutual funds interesting?

  • It is a way for small investors to have an opportunity to invest in foreign countries without having to spend a lot of money. Have a professional to help manage investment and making it possible to diversify investment into a wide range of financial products, more than those offered in the country and help diversify investment risks due to the high volatility in the domestic financial market

  • There are many options for investors. Since the current investment policy of FIF mutual funds is very diverse. There are both foreign debt funds, foreign stock funds, mutual funds, commodities such as gold mutual funds. The investment in the Gold Mutual Fund is also one of the types of investment in FIF mutual funds.

  • Some funds have chosen to focus on investing in certain regions of the world, focusing on emerging markets with an emerging growth trend. For example, BRIC countries (Brazil, Russia, India, China) or some choose to invest in utilities, renewable energy, pharmaceutical, and pharmaceutical industries. Or may choose to invest in the new innovations industry which is not yet in Thailand, etc.

How to evaluate the performance?

In general, the fund's results will be used to compare with the specified benchmark. The Asset Management Company will select the benchmark that is consistent with the investment policy of the fund. Which will be disclosed to investors in advance. Such as FIF mutual funds that invest in crude oil futures contracts will evaluate the performance of the fund against the global crude oil price index, such as the Deutsche Bank Liquid Commodity Index. Asset Management Company will tell the name of the index and resources to view these indicators in the prospectus.

Who is suitable for?

Investors who want to diversify their investments in other countries which can get the return that difference from domestic investment. At the same time, they must have knowledge and understanding of the risks of FIF mutual funds that will be more and different from domestic investment funds.

Return and risk from investment in FIF mutual funds

The return that we will receive from investing in FIF mutual funds is the same as the return on investment in mutual funds in general. Which will be acquired in 2 forms, capital gain or excess profit from the investment unit value and dividend (Which investors will receive or not receiving dividends depends on the dividend payment policy of the fund)

For the risk of FIF funds, investors must study and understand because there are risks involved in addition to the risks of mutual funds in general. The risks of FIF mutual funds are as follows:

  • Risk of securities invested, such as in the case of stock funds, there are major risks due to the volatility of stock market prices.

  • If it is a fixed income fund, there are major risks that subject to the ability to repay the debt of issuers or liquidity issues, etc. In the case of debt instruments, Investors should see whether to invest in government or private debt instruments. What is the credit rating of instruments and securities? Where the credit rating is divided into two groups, namely Investment Grade or Investment Group (AAA to BBB-) and Speculative Grade or Speculative Group (BB + - Down to D)

  • Risks of economic and political conditions of the country in which the Fund invests (Country Risk) which can be caused by changes in political policies or fluctuations in the economic conditions of that country.

  • Risks in limiting the investment return (Repatriation Risk) is a risk that countries that may invest in capital control measures may not be able to invest and return to Thailand as expected.

  • Foreign Exchange Rate Risk caused by foreign mutual funds must exchange the baht into foreign currency first to invest money. When receiving returns and principal in the form of foreign currency, they must exchange back into baht to pay back to the investors who want to redeem the investment units. Or pay back to the investor when the foreign mutual fund matures

In general, this risk can be reduced by hedging, such as making a futures contract to lock the baht at the rate that the fund manager thinks will be a benefit to the fund in the future. But hedging will increase the cost Which may cause the return of the investors to be reduced

The SEC has determined that the Asset Management Company must clearly inform investors of the risks of currency exchange rates in the currency of the underlying investment and the policies used to manage that risk in the prospectus for offering that investment unit. And must also be disclosed in all types of documents used for the offering of mutual funds, such as documents, advertisements, public relations and documents that are distributed at the seminar of the mutual fund as well. And must specify which types of risks are protected in these 4 types, including

          1.  Protect the whole amount of risk. (Allowing to prevent the risk of not less than 90% of the investment amount for mutual funds that have a moving investment portfolio)

          2. Prevent some risks Which must clearly specify the proportion

          3. Prevent risks at the discretion of the fund manager.

          4. Did not prevent the risk at all. If not protecting the whole amount or almost the whole amount (Use methods according to 1 - 3) Must also write a warning to investors that they may receive less profit or not receive a full principle as they have been invested on the first page of the prospectus. So that investors can see clearly.

In addition to having a clear disclosure of information, the SEC also provides guidelines for asset management companies to be able to provide evidence to confirm that Investors in these mutual funds understand and aware of various risks and warnings. Therefore, investors should read and understand various risk information. associated Including exchange rate risk and risk management Before ordering investment units of FIF mutual funds