Reduce your portfolio risk with international funds

International funds tend to do well when Indian markets are in a bear phase

International funds are doing very well currently. Eighteen of these funds have given a return in the range of 15-26.19 per cent over the past one year, according to data from Value Research. This is not a geography-specific phenomenon. The list includes European, Chinese, US, Asian, emerging market (EM), diversified global equity funds, and so on. 

Experts attribute two reasons for the sound performance of these funds. “Interest rates continue to be low — between zero and 2 per cent — in developed markets. In such a scenario, investors don’t have too many alternatives, besides equities. As for emerging markets, 2014-15 was a bad year for them when they got hammered due to the crash in commodity prices. Now, commodity prices have stabilised and hence these markets are witnessing a bounce back from the bottom,” says Nitin Jain, chief executive officer, global asset and wealth management, Edelweiss Capital. Adds Anil Ghelani, senior vice-president, DSP BlackRock Investment Mangers: “We have seen a common trend across most global markets of low volatility and high liquidity, coupled with a globally synchronised growth in corporate earnings. The result is a strong rally in equities across many developing and developed markets, and positive returns in the past one year for international funds with a focus on such countries or regions.”

While these markets are doing well at present, there are risks on the horizon. “If interest rates in the US were to rise faster than expected, that would have a meaningful impact on asset allocation, and hence on the performance of equities. Emerging markets continue to be vulnerable to risks arising from domestic politics and commodity prices. If commodity prices were to correct considerably, these markets would get hurt,” says Jain.

Currently, Indian equity funds are also doing very well: Large-cap equity funds have given an average return of 18.25 per cent (Sensex’s return is 15.56 per cent) over the past one year, mid-cap funds 21.86 per cent and small-cap funds 31.87 per cent. Why then should an Indian investor turn to international funds? "The primary reason for investing in these funds is diversification. Sometimes, when the Indian market is not doing well, international funds tend to do well. Having exposure to these funds reduces the overall risk within your portfolio," says Kaustubh Belapurkar, director-manager research, Morningstar Investment Adviser India. According to Jain, investors who plan to send their children abroad for higher studies or buy a house in a foreign country should invest in these funds to guard against currency risk (the risk of the rupee depreciating against a major currency like the US dollar over the long term).

Conservative investors who have only a small allocation to equities can make do with exposure to Indian equity funds only. But any investor who has allocated more than 50 per cent of his portfolio to equity funds should have at least a 10 per cent (of his equity portfolio) exposure to international funds. 

Belapurkar suggests investing in US-focused funds. "This is a developed market with a low correlation with the Indian market. It is also the largest equity market globally. Moreover, the stocks these funds invest in are of large multinational companies that derive a major part of their revenue from all over the globe. Hence, investing in these funds is not just a bet on the US market but gives you global exposure," he says. Investors may avoid EM funds since they already have adequate exposure to this zone via the domestic market. While most investors should follow a buy-and-hold approach, seasoned investors with a view on this market may tactically churn these funds.