In one of the most innovative product launches globally, domestic fund houses are gearing up to roll out funds that will invest in frontier markets.

Distressed by the falling spree of Indian equities, fund managers are looking at various avenues of diversification. At a time when emerging markets, including India, are vulnerable to global cues and are more coupled, frontier markets showless or almost no correlation.

Franklin Templeton was the first to spot an opportunity and has already filed for a MENA fund (Middle East North Africa Fund), which will invest in some of the frontier markets. Morgan Stanley Mutual Fund is also firming up plans for a fund based on frontier markets.

Frontier markets include countries such as United Arab Emirates, Qatar, Bahrain, Egypt, Jordan and Morocco among others. They are described as smallest, less developed, less liquid countries that make up a chunk of emerging markets.

According to a Merrill Lynch report on Frontier markets, "Frontier markets appear to be less volatile than other equity markets. They have strong external balances and economic growth, particularly in Asia and the Gulf."

"The S&P/ IFC Frontier Index, an index which measures performance of 37 frontiers has returned an average of 37 per cent per annum during the last five years, while MSCI Emerging Markets Index has returned 25 per cent every year.

So, these markets have clearly outperformed other markets and more so, over a period of time," said a senior executive from a fund house.

While the benchmark Sensex plunged more than 40 per cent from its peak this year, S&P's FM Composite index that tracks Frontier markets has returned only -9.48 per cent on a year-to-date basis (till July).

When emerging economies and even developed ones have been spooked by issues such as peaking inflation, oil prices and rising interest rates, frontier markets have remained unscathed and some of them are even producers of oil.

Says Anthony Heredia, chief executive officer, Morgan Stanley Mutual Fund, "Our global fund -- Morgan Stanley Frontier Emerging Markets Fund -- has clocked positive returns of 0.11 per cent year to date. So, it makes sense to go for such a  fund because these countries are in different stages of their economic cycle, which throws up a lot of potential for investors."