When you should look at international funds

Experts say investors must consider these for geographical diversification, hedging currency or for exposure to stocks not available in India

One look at the category average returns of international funds is enough to drive investors away. In the past five years, it has returned only 0.83 per cent annually – the lowest among all mutual fund categories. Even over three and one-year periods, the category's average returns is among the worst. But, there is still a case for investing. There is a wide difference in returns of international funds, depending on the country and theme. For example, the best performing fund, Motilal Oswal MOSt Shares NASDAQ – 100 ETF (exchange traded fund), has returned 17.51 per cent, whereas the worst performer HSBC Brazil Fund has -36.08 per cent return in the past year. Over the long-term (five years), Birla Sun Life International Equity Fund has 12.47 per cent returns annually, Kotak World Gold Fund is at the bottom at -16 per cent returns.

While the number of international MF schemes is increasing, so is the confusion for investors. The category has funds that focus on countries like the US, Brazil, China, and Japan. The, there are ones that invest in regions such as Europe and emerging markets, and also include those which focus on specific sectors – real estate and mining.

Experts say investors can look at these funds for three reasons – to geographically diversify portfolio, as a hedge against currency, and to take exposure to stocks that are not available in the Indian market.

Sundeep Sikka, chief executive officer, Reliance Capital Asset Management, says it’s necessary for investors to diversify their portfolio geographically, like they do it among different assets. If one country is not doing well, the other may. Sikka points at his company’s Japan Equity Fund that has provided the company about 16 per cent returns in the past year, better than most other schemes across categories. But, he says when Indian investors look for diversification, they should opt for developed countries only, where a single industry does not form a major part of the economy. “Brazil, for example, is dependent on natural resources and Russia on oil. Countries like these should be avoided,” says Sikka.

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Dhaval Kapadia, director (investment advisory) at Morningstar India, says economies that have a correlation to India should also be avoided. Investors should, therefore, also avoid emerging market funds. “We have seen that when foreign investors withdraw funds, they do it from all emerging economies, affecting them negatively,” says Kapadia.

These funds can also help if a person wants to hedge currency for the long-term. For example, if they intend to send their child to the US for education in the next five to seven years; they can invest in a US-specific fund. If a person is investing in US fund and the dollar becomes stronger against the rupee, the returns a person gets will be higher.

Some investors also look at international funds to take exposure to stocks that are not available in India, says Vidya Bala, head of research at Fundsindia. For example, some may want to catch the action that’s happening in the technology stock at Nasdaq or a contrarian bet on mining companies. But, Kapadia of Morningstar says these may need to be timed and small investors should stay away from such funds. If you are looking to invest in an international fund, experts suggest it should not be more than five to 10 per cent of your total equity exposure.

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