Despite correction, keep SIPs in US funds going for diversification benefit

Over the past three months, international funds focused on the US markets have corrected 0.34-10.74 per cent (average decline has been 5.78 per cent). The average annual return from these funds over the past five years has been an attractive 11.36 per cent. Experts suggest investors should not allow themselves to get spooked by the recent market correction and keep their investments in these funds going. 

Several factors were responsible for the recent downturn. "The concerns centred chiefly around rising interest rates and the US-China trade war," says Radhika Gupta, chief executive officer, Edelweiss Mutual Fund. There are fears that if the US Federal Reserve continues to hike rates rapidly in 2019, money could shift from equities to debt. As for the trade war, while it would hurt China, US businesses, which are highly dependent on overseas markets, would also bear the brunt of a possible slowdown in global growth.

Market participants are also worried about whether the ongoing rally has any steam left. "The current rally has been going on since 2009, accompanied by a significant period of economic expansion. Investors are asking whether the market is close to its peak and may turn soon," says Aashish P Somaiyaa, chief executive officer, Motilal Oswal Asset Management Company.

Experts say investors should keep their investments in the US markets going as the fundamentals remain sound.
 

"GDP growth in the US is recovering. Relatively low interest rates and low unemployment are providing a tailwind to consumption. Earnings growth for the S&P 500 has been reasonably strong, aided by tax cuts. Moreover, the S&P 500 is valued at a forward price-to-earnings ratio of 16.8, which is not too expensive," says Gupta. 

Investors should also not pull out of US equity funds on account of the diversification benefit. Somaiyaa says that an investment in the US market gets you two types of diversification — exposure to a developed market and to the dollar. 

"The Indian market has a weak correlation with the US market. When money flows out of emerging markets, it goes to developed markets like the US. And when the rupee does badly, the dollar does well. Hence, an exposure to the US market acts as a useful counterweight in an Indian investor's portfolio," says Somaiyaa. 

The rupee tends to depreciate at the rate of 3-4 per cent vis-à-vis the dollar over the long term. This provides a boost to Indian investors' returns from US funds. Investors should, however, have only a limited exposure to foreign markets like the US. "Allocation should not exceed 20 per cent of your portfolio. Investors should participate in these markets also through the SIP/STP route, so that any correction provides an opportunity for cost averaging. 
 

Moreover, if you have entered these funds with a five- to seven-year horizon, as you should in the case of any equity investment, you should just ride out the current phase of volatility," says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. 

Another lesson the current correction has thrown up is that investors should not take exposure to a sector or thematic fund first. The technology sector, which has led the rally, took a considerable hit in the recent correction. "Ideally, investors should take exposure to diversified US funds first and only then buy a sector fund such as one focused on technology," adds Dhawan.