Use international funds to diversify

But avoid commodity or combination funds, as things don't look too bright

Want to get an international flavour to your portfolio? Fund houses are getting ready to provide a large number of options. In January, a number of fund houses filed offer documents with the Securities and Exchange Board of India (Sebi) to launch international schemes. The choice is diverse. HSBC Mutual Fund filed papers for Russia Equity Fund. Reliance filed for the US Equity Opportunity Fund, Franklin Templeton India Feeder Asia LatAM Fund and Axis Asian Asset Income Fund.

Returns also justify the rush to tap investors interested in this genre. In the last one year, international funds have returned more than any equity funds (sans mid- and small-cap and defensive) with close to 9.50 per cent return, according to data from mutual fund tracker Value Research. During the same period, equity diversified funds returned 8.50 per cent, Sensex 7.40 per cent and the Nifty 6.80 per cent.

Over a three-year period also, international funds have beaten the old favourite, equity diversified, by almost a per cent, returning close to eight per cent. The story is only repeated in the five-year period, with nearly five per cent as against 4.25 per cent from equity diversified funds.

Investment experts are recommending global funds as a good portfolio diversifier. But, all global funds are not doing so well. There are three types of international funds (mostly fund of funds) – commodity international funds, country-specific funds and emerging market global funds.

According to Value Research, among the top five best performing international funds, three have exposure to Asia, more specifically China. JPMorgan Asean Equity Offshore returned almost 32 per cent in the past year, JPMorgan Greater China Equity Offshore has returned 21.50 per cent, Goldman Sachs Hang Seng BeES has given 21.50 per cent, DWS Global Agribusiness Offshore Reg has returned 24 per cent and ING Global Real Estate Retail has given 24 per cent.

Says Hemant Rustagi of Wiseinvest Advisors, “Right now, commodity and related foreign funds are not the place to be in, especially if the fund invests in precious metals. In the last one month, equity-commodity or gold-equity combined funds have been hammered very badly.”

Take a look at the non-performers in this genre in the past year and you will find all gold-related funds – ING OptiMix Global Commodities, DSPBR World Mining Reg, DSPBR World Gold Reg, PineBridge World Gold Standard and Birla SunLife Commodity Equities Global Precious Metals are at the bottom of the list.

“We have been pro-global funds for some time now,” says Renu Pothen, head of research at Fundsupermart.com. “But we have some picks like funds with exposure to Asia, China and Brazil. We are positive on country-specific international funds, as opposed to commodity ones. Though China did not do well last year, we did not take the exit call because we are very positive on the country,” she adds.

Of course, the falling rupee has boosted the returns of many of these schemes. If the rupee strengthens, returns from these funds would get capped. But, in uncertain times, they are good portfolio diversifiers.