US funds shine as stocks gain and rupee depreciates against dollar

International funds putting money in the US markets have got a boost on the back of the sustained uptick in US equities and the depreciation of the Indian rupee against the greenback in the past few weeks.

Average category returns for US-focussed funds for the past year has been 31 per cent, with Motilal Oswal Nasdaq 100 ETF emerging the top performer with returns of 41 per cent. These returns are higher than most other categories of equity funds, including diversified equity funds and sectoral funds. The benchmark BSE Sensex has risen 18 per cent in the past one year.

The rupee touched an all-time low against the dollar recently and is trading at 71.8 levels. It has depreciated about 11 per cent against the dollar in the past year.

“We expect US GDP and productivity growth to moderate in our base case, but if US capex and productivity growth and/or oil production remain strong, the Fed can and will tighten further, and the US dollar could stay stronger for longer,” said a recent note put out by Morgan Stanley.

The S&P 500 index notched up its all-time high last month and has broken the previous record for the longest bull market in the US equities. US equities have benefited from the boost in earnings from the tax reforms initiated by President Donald Trump and the surge in share buybacks by companies.

Experts believe that the performance differential between US equities and emerging markets should continue, especially if the Fed continues to hike rates, leading to flight of capital from risky assets to safe havens.

Financial planners recommend setting aside 5-10 per cent of one's portfolio for feeder funds. International fund investors need to assess two key parameters before investing. The first is the prospects of the country, region or theme the fund will invest in, and the diversification it offers. Investing in the US can prove useful as the US markets are historically thought to have a low correlation to India.

The second is the currency play and the ability of the investment to protect against currency depreciation. Currency play, if at all, should be used with a specific goal in mind, say experts. For example, if you plan to send your child to the US 5 years from now and expect the rupee to depreciate 5 per cent every year, adding US funds to your portfolio might be a good idea.