Franklin Templeton is gearing up to break a long period of stasis in India's funds industry by introducing its first offshore products. The move follows similar launches from BlackRock, JP Morgan Asset Management and Mirae Asset. Fidelity International, which closed its first feeder fund in India in December, a tactical commodity-stock product, is also now re-opening to additional marketing.

Fund launches have been a rarity in India over the past year-and-a-half. The industry was once based on opulent marketing campaigns for new funds, a practice that ended in 2008, when the Securities and Exchange Board of India (Sebi) ceased allowing the financing of these efforts to be amortised. Then last summer, Sebi banned up-front loads on fund sales, and distributors have since lost interest in selling anything without a track record.

Not only have there been hardly any new fund offerings in India, but there were none involving offshore products during 2008 and most of 2009. Indian investors simply haven't been interested in risking unknown markets when their own stock market has performed well and the rupee has been strong against the US dollar.

Harshendu Bindal, Mumbai-based president for India at Franklin Templeton Asset Management, says the firm plans to introduce a range of Europe-domiciled funds within the next three to six months. They will be offered through a feeder funds route and will include a variety of geographic and asset-class products.

JP Morgan was first to market with a feeder fund in 2009, selling a China equities product. Mirae Asset followed, also with a China fund. BlackRock closed a mining fund in December.

Global fund houses operating onshore have existing products that are locally domiciled and will invest a portion of assets into overseas securities. Such products have an advantage over pure offshore products, because their capital gains on equities are not taxed, so long as 65% of the fund or more is invested domestically. This advantage may disappear in 2011 if the parliament approves pending legislation that would eliminate tax breaks of this sort.

Distribution may ease as well. The Reserve Bank of India (RBI), the central bank, now permits around $15 billion in aggregate to be invested by retail investors overseas. The actual outflow has yet to reach $1 billion. In part, this is due to lack of demand. It is also because distributor banks have been restricted by the RBI as to how they sell overseas investments, which in practical terms has restricted the market to affluent clients. The market in India for wealthy individuals seeking overseas allocations to mitigate risk is small.

Bindal says there is talk among regulators to allow banks to directly sell offshore products through their networks. No concrete plans have been set out, but he envisages distribution opening up within a year or so.

He also believes the relative attractiveness of global equities will improve in the short run, because India's stock market is expensive and markets in developed nations may come to look relatively better.

India does not permit the use of derivatives in funds sold to its investors, whether retail or institutional. So Franklin Templeton cannot simply offer its Luxembourg range of Ucits products, many of which include derivatives strategies. The firm will have to limit itself to plain-vanilla offshore products. This could prevent it from selling products with the best track records.

Bindal does not expect offshore funds to find a rapturous audience in India. The move is intended to lay a foundation over, say, a five-year period.

The amounts being raised are modest. Fidelity executives hope to raise $50-60 million over the course of 2010 for its commodity-stock product.

The mutual-funds market has very low penetration in India; around 4% of households own a fund. Easing distribution, equalising taxation and the gradual expansion of demand for exposures beyond local stocks should give foreign products a chance over time, Bindal argues.