The fund offers some diversification, not-so-high returns and a high correlation with the direction of the Indian market

Seoul-based Mirae Asset has launched 'Tiger Kospi', its first exchange-traded fund outside South Korea. Tiger Kospi is based on the Kospi 200 and the ETF was listed on the Hong Kong Stock Exchange on Wednesday. It is also the first ETF in Hong Kong to track the Kospi.

Mirae's investment objective for Tiger is to seek to provide investment results which before deduction of fees and expenses, closely correspond to the performance of the Kospi 200 index. The index is based on 200 blue chips and its top five constituents by weightage being Samsung Electronics, Pohang Iron and Steel, Hyundai Motor, Hyundai Heavy Industries and Shinhan Financial Group.

The fund is also being promoted in India. But does it make sense for an Indian individual to invest in the fund? Let's go back to the basics. What does an investor look for when he buys a particular fund? He looks for a higher return, diversification and exposure to an uncorrelated asset class.

For instance, an Indian investor would invest in a foreign fund only if it had a low correlation with the Indian markets. But, while investing in the South Korean market offers a means of diversification, this is marred by the fact that the fund will invest only in stocks of a single country, that is South Korea, and this leads to concentration. A majority of the Fund's assets will be invested in securities that are denominated in Korea Won, which will mean exchange rate risk.

What about returns? Kospi's return for the past nine years has been lower than the Sensex. The average returns for the Kospi, for the last nine years is 20% and that for the Sensex is 34%. The Tiger Kospi passes one of the tests; it gives exposure to a new asset class. But is it uncorrelated?

The correlation of Kospi's up and down years to the Sensex is very high. Every year the Kospi was up, the Sensex was up too, and every year the Kospi was down, the Sensex was down as well. Thus what we are getting is some diversification, not-so-high returns, and high correlation with the direction of the Indian market. So why get exposed to it and take additional risk? — Moneylife Digital Team