China-focused MFs: Take limited exposure, watch out for policy shifts

The Hang Seng Index has risen 18.8 per cent in the past three months and 43.1 per cent over the last year. China-focused mutual funds available in India have delivered between 22 and 71 per cent returns over the past year.

 

Diversify across emerging markets

 

Exposure to China allows Indian investors to diversify beyond domestic markets. “Investing beyond one’s home country enhances portfolio diversification,” says Niranjan Avasthi, senior vice-president, Edelweiss Mutual Fund.

 

“Indian investors get exposure to sectors not well developed in India,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

 

A volatile market

 

China’s markets have long been volatile. “It has often been impacted by sudden policy shifts,” says Avasthi.

 

This unpredictability poses risks even to long-term investors. “A sector might be doing well and then the government could intervene, completely upending its prospects,” says Arun Kumar, vice-president and head of research, FundsIndia.com. Technology and education sectors have faced sudden regulatory crackdowns in the past.

 

Demographics are another concern. “The population is ageing rapidly due to the one-child policy implemented decades ago,” says Dhawan.

 

The stressed real estate sector, a key driver of the economy, has not yet stabilised.

 

What sparked the rebound

 

Following a period of underperformance, valuations were attractive in China last year. Sentiment turned in September 2024. “The Chinese government introduced a stimulus package focused on supporting the property market and market stabilisation. It also undertook monetary easing to counter the economic slowdown and boost investor confidence,” says Avasthi.

 

The launch of DeepSeek also helped. “China is now viewed as a competitor to the United States in AI,” says Kumar.

 

Investors anticipate a more accommodative stance from the Chinese government towards its companies, especially amid the tariffs being imposed by President Donald Trump. 

 

Will the momentum sustain?

 

GDP growth has crossed the 5 per cent mark. “This has fuelled a market rally that could sustain in the near term,” says Avasthi.

 

Other experts believe the outlook remains uncertain. “Much will depend on how Trump’s tariffs and trade wars affect the Chinese economy. If they result in a global slowdown, it would affect all geographies, including China, which continues to be a very large exporter,” says Dhawan.

 

Valuations have started to align with long-term averages, reducing the earlier margin of safety. “This could lead to investors evaluating other geographies as well,” adds Dhawan.

 

The performance of key sectors also matters. “Any further setback in real estate or a reversal in consumer demand could lead to loss of momentum,” says Avasthi.

 

Geopolitical risks persist. “A more aggressive trade war than is being anticipated, or conflicts over Taiwan, could create challenges,” says Dhawan.

 

What should you do?

 

According to Kumar, those who entered two–three years ago at lower valuations could have allocated 5–10 per cent. “Those entering now should allocate 5 per cent and take a call over time,” he says.

 

Dhawan advises risk-tolerant investors to invest 5–10 per cent of their equity portfolio.

 

Kumar recommends a cautious, tactical approach. “Investors who had entered earlier at very low levels may continue to hold. Those who enter now should enter with a three-year view, but book profits if returns are strong,” he says.

 

For long-term investors, Dhawan recommends a 10-year horizon to manage drawdowns. He also suggests investing via the systematic investment plan (SIP) or systematic transfer plan (STP) route.

 

According to Kumar, investments in Chinese funds should be part of the investor’s satellite portfolio.