International funds will gain from weak rupee

While they are a good hedge for expenses like children's education on foreign soil, limit your exposure

Investors of international equity funds, especially those that invest in US equity markets, have seen an increase in returns over the past few months, due to the weakness in the rupee. According to data from Value Research, in the past three months, the category average returns of international funds has been 7.96 per cent – the top performer.

The fortunes of these funds have turned around in the recent depreciation of the rupee by 1.5 per cent against the dollar since the beginning of December. And with the US Federal Reserve likely to increase interest rates, it is expected that foreign investors will sell investments in emerging markets, including India. This outflow of funds, if it happens, will put further pressure on the rupee.

According to Vidya Bala, head of Mutual Research at FundsIndia.com, the decision to invest in international equity funds should not be based on currency movement. It should be based on the need to diversify your portfolio and hedge your portfolio by investing in markets that have low co-relation with Indian markets. “Investors look to gain from currency movements by investing in international funds. But that involves high risk. The right way is to bet on currency itself, and not the market. Because, by doing so, you may end up taking a wrong call on both the market and currency,” she says.

Raghavendra Nath, managing director, Ladderup Wealth Management, also says that currency depreciation is not a reason to invest in international funds at all. That is only a myopic view. “International funds will reduce the risk of your portfolio and improve the predictability of your returns. One should look at international funds purely from risk diversification perspective. Depreciation will only add to returns,” he says.

The US market is currently doing well and will definitely give better returns in the near term, as it will not be as volatile as the Indian equity market. But over a longer term, Indian equities will give better returns. So, one can look at international funds, provided they have sufficient exposure to Indian equities.

Indian equity markets are relatively more volatile, even though they offer higher returns. As a hedge against the volatility, it is advisable to invest a part of your portfolio in markets that have low volatility and low risk, even if prospects of returns are lesser than Indian equities.

“Developed markets like the US and Europe offer this hedge as they demonstrate different risk characteristics from India. Investing in these markets will give your portfolio the required diversification,” says Supreet Bhan, executive director, head (retail sales) at J P Morgan Asset Management.

European equities look positive because earnings have gone up and companies have created efficiencies by cutting costs. Besides, with the European Central Bank starting its quantitative easing, liquidity will continue to be comfortable, which will support equities, Bhan adds.

International funds also allow investors to invest in dollar assets. So, if you have goals such as children's higher studies or foreign trip, you can hedge against currency depreciation by investing in international funds.