Stay invested in US funds even if returns aren't attractive currently

It helps to diversify geographically; while YTD returns of Indian markets are positive and US markets negative, the opposite will also happen at some other time

International funds focused on the United States (US) market have taken a severe beating in this calendar year. These funds have fetched year-to-date (YTD) returns ranging from -3.8 to -28.9 per cent.

Inflation and rate hikes took a toll

One of the key reasons for the market downturn in the US is high inflation. “Inflation has been at the higher end in the US for almost a year. The Russia-Ukraine war has compounded the problem by raising energy prices,” says Pratik Oswal, head–passive funds business, Motilal Oswal Asset Management Company (AMC).

The US market did very well from 2019 to 2021 owing to outperformance by growth stocks both in terms of earnings and business growth. “Once the US Federal Reserve started hiking rates last year to tackle inflation, growth stocks, led by technology stocks, which were trading at high valuations, took a severe beating,” says Niranjan Avasthi, head-product, marketing and digital business, Edelweiss AMC.  

Aggressive rate hikes have taken a toll on economic growth as well. “US GDP growth contracted in the first and second quarter of calendar year 2022. The fear that the US economy could tip over into a recession is also responsible for the market correction,” says Vidya Bala, co-founder, Primeinvestor.in.

Chasing past performance is risky

A lot of money poured into US-focused funds when their past returns were looking good. “When investors put money in a fund based on past returns, expecting similar performance to be replicated in the near future, they are bound to be disappointed,” says Avasthi.

The downturn has also underlined the importance of diversifying across sectors. Funds focused on narrower themes (such as the one focused on NYSE FANG+ stocks) have been hit hard.

Even funds based on the Nasdaq-100 index, which is tech-heavy, have declined around 22-23 per cent. “The NASDAQ 100 has exposure to cloud services, OTT, work from home solutions, etc—stocks that boomed during the pandemic. As interest rates rose, these stocks, which were trading at high valuations, got de-rated the most,” says Bala.

The lone index fund based on the broad-based S&P 500 index has declined less (around 12 per cent YTD).    

Value stocks have fared better, hence Edelweiss’s value-oriented fund has declined the least—only around 3.8 per cent YTD.  

Stay invested

The primary reason for investing in US funds should not be to earn high returns but to get the benefit of geographic diversification. “There is no guarantee that international funds like those focused on the US will offer higher returns. Nonetheless, investors must take exposure to them to guard against country-specific risk—the very small possibility of the Indian economy and markets underperforming massively over the long term,” says Avinash Luthria, a Sebi-registered investment advisor and founder of Fiduciaries.

Recent market movements have confirmed the US market’s low correlation with the Indian market, and hence its ability to provide diversification benefit. YTD, the Indian market is up while the US market has clocked negative return. “There will be times when the opposite happens, which is why investors should hold on to these funds,” says Awasthi.        

The US market offers investors access to several stocks and ETFs that are not available on the domestic market, such as big tech. By investing in these funds, Indian investors also get the benefit of currency diversification.

While the macro-economic situation in the US has turned murky, corporate performance has held up. “While growth has slowed down, last quarter’s performance was reasonably good,” says Oswal.

When US funds were performing well, some retail investors had raised exposure to them. Once these funds recover, they should pare their exposure to 10-15 per cent of their equity portfolio.

Selling a fund when it is witnessing a downturn is among the worst decisions an investor can take. Moreover, with so many US-focused funds closed to investment (due to the regulatory limit), re-entering these funds could be difficult. By continuing with your SIP, you will be able to buy units at a lower price now, which will boost returns over the long run.