Time to turn bullish on US-based funds

With uncertainty looming large over Indian markets, retail investors can increase their exposure to US funds

Most financial planners insist that as a diversification strategy, one should keep an exposure of 10 per cent to international or sector funds. But the case for increasing this exposure to 15-20 per cent, especially in US-based funds, seems to be getting stronger.

There are several reasons: With indications getting stronger that the Federal Reserve may start tapering its bond-buying programme, the days of easy liquidity may become a thing of the past, sooner than later. The rupee has depreciated 13.67 per cent since the beginning of the year and pressure on the currency will continue if there are dollar outflows. Also, with elections due in the next six months, there will be uncertainty about the political climate.

Says Gaurav Mashruwala, financial planner: “While the world may not like the tapering down, there are indications from statements by the Federal Reserve that the US economy is coming out of the woods.” Accordingly, he feels that a retail investor who has not been investing in US-based funds can start doing so. And existing investors can increase their exposure as well.  

The US markets have already done well in the past year. The Dow Jones Industrial Average and S&P 500 crossed all-time highs last week. The one-year returns of DJIA, S&P 500 and Nasdaq have been 24 per cent, 28 per cent and 34 per cent, respectively.

Investors’ returns on US-based funds have been bolstered further by a depreciating rupee and also, equity picks. DSPBR US Flexible Equity, ICICI Prudential US Bluechip Equity, Motilal Oswal MOSt Shares Nasdaq 100 ETF and FT India Feeder Franklin US Opportunity have returned 45.18 per cent, 45.77 per cent, 50.18 per cent and 51.65 per cent, respectively.

In comparison, the Sensex and Nifty have returned only 10.19 per cent and 7.51 per cent, respectively. And only one equity fund – Franklin Templeton Infotech – has returned 53 per cent in the past year.  

Says Hemant Rustagi, CEO, Wise Invest Advisors: “If you are a believer in diversification, then it makes sense to put in a substantial amount in US-based funds; otherwise a small investment will not give any fillip to your portfolio.” For instance, if you have a Rs 5-lakh portfolio and put just Rs 25,000 in an international scheme, then even in case of an exceptional performance it would hardly improve the returns of the portfolio. But a 20 per cent exposure will make a difference.

If you are willing to invest in these funds, remember a couple of important things. One, the tenure of investment should not be short term (less than a year) because there will be a short-term capital gains tax that will erode the returns substantially. Since international funds are treated as debt funds, the capital gains will be added to your income and taxed accordingly.

For the highest income tax bracket, this rate would be 30 per cent. The long-term (more than a year) capital gains tax is 10 per cent and 20 per cent, with and without inflation indexation benefits. Also, invest for at least two to three years, thereby giving time to the scheme and fund manager to perform.