Investing in global funds will provide diversification, better returns

Dollar assets also make sense if you are planning to settle abroad

With the US markets hitting new highs in the past few days, more investors are getting attracted to these markets.

In May, mutual fund schemes investing in the overseas market gave returns of 3.98 per cent — the highest category average returns, according to the Value Research data.

Says Yogesh Kalwani, head-investments, InCred Wealth Management, “While it is natural to have a home bias while building a portfolio, if you look at the last 10 years, the Indian equity markets have given no returns in dollar terms. In comparison, the top three markets are the US (10 per cent a year), Taiwan (7 per cent a year), and China (5 per cent a year) over 10 years as of March 2020.”

When it comes to the US markets, there are certain areas they are doing well. Adds Kalwani, “Every market has different sectors or companies leading. For example, in the US, it’s all about technology stocks viz., FAANG (Facebook, Amazon, Apple, Netflix, and Google) that has led the markets.”

Adds Pratik Oswal, head-passive fund business, Motilal Oswal AMC: “The US market should be the first market for diversification due to two reasons. It’s the world’s largest economy, and many of its companies have a wide global presence. Not only are you playing the biggest economy, but also its international expansion over the next decade.”

 

 

Another major reason for this is currency depreciation, that is, depreciation in the value of the rupee. In the last one year, the rupee has depreciated 8.13 per cent. In the past six months, it has depreciated 6.04 per cent, buoying returns of international funds. As international funds invest in foreign currency-denominated stocks, the rupee depreciation has a positive impact on the return of the overall scheme.  Says Pranjal Kamra, chief executive officer (CEO), Finology, “So, the Indian investor with exposure to such schemes will earn profits in the short run.”

Another reason why investing in international funds makes sense is diversification. Says Oswal, “I don’t think investors should be lured by the high returns generated in the US market over the past six-12 months. The main reason for buying international equity at this point (or at any point) is diversification. Investors need to allocate 10-15 per cent of their portfolios in international investment over the medium term to reap rewards of diversification. The US markets have historically had low correlation with the Indian markets, while offering the same return profile — thus, leading to higher portfolio stability.”

One can go to other markets as well. However, most experts recommend a part of investors’ portfolio in global equity, but begin with the US. Take a staggered approach through systematic investment plans.

Says Feroze Azeez, deputy CEO, Anand Rathi Private Wealth Management, “If you are going to another country, you need to go to one with different attributes other than your own. You are going there to invest in a deeper market, a more technology-driven one to mitigate your risk. If you invest in China, you have not just been subjected to the dollar, but to the yuan as well.”

Adds Azeez, “Those who have dollar aspirations or goals, investing systematically makes definite sense. For instance, a child’s education abroad. But, if you are a high networth individual, or someone with profit maximisation as an objective, it will not make so much sense today.”