MF Query Board

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I have a SIP of Rs 500 in Franklin India Feeder-Franklin US Opportunities Fund – Growth for long term. Should I continue investing in it via SIP or should I stop the SIP based on the current status of Franklin Templeton India which has closed some of their debt funds?

-Abhishek Nigam

There are different reasons to invest in international funds. You may invest in them to mitigate the foreign exchange risk or consider them as a means to diversify your portfolio. You may also invest on account of financial goals such as foreign education or vacation that may require you to have parked funds for international exposure. From your query we could not identify your purpose of investment. To understand the next course of action, we need to study how this fund invests. This fund aims to generate capital appreciation by predominantly investing in units of Franklin US Opportunities Fund which is an overseas fund from Franklin Templeton Asset Management Company (AMC).

Franklin US Opportunities Fund primarily invests in securities in the US. This means that this fund has exposure to only US stocks. This cannot be termed as a pure international fund. And since this fund has exposure to US stocks, it carries countryspecific risk. This means that the risk would be linked more to the US markets. This fund is benchmarked against Russell 3000 Growth Index. It is a float-adjusted and market cap-weighted index and includes the largest 3,000 US companies representing approximately 98 per cent of the investable US equity market. Let us now look at the performance of this fund compared to its benchmark and its category.

As can be seen from the above table, clearly Franklin India Feeder-Franklin US Opportunities Fund has outperformed not just its benchmark but also with regards to its peers. With this we can say that this fund has indeed performed well. Hence, if you have invested in this fund with an intention to diversify or mitigate US dollar currency risk, then we would recommend you to stay invested in it.

However, currently businesses all around the world have been impacted due to the pandemic, not to forget the deteriorating relationship between US and China and recession that has begun to rear its ugly head. Therefore, if you are investing tactically then you can consider booking profits. However, if you have recently started investing in this fund, than continue with your investment via SIP.

It is said that equity mutual funds have no guaranteed returns. So if I invest in an equity fund with an investment horizon of 10 years, how much return can I expect to earn from it?

- Juhi Vashisht

Yes, you have rightly understood the crux of investment in equity – there is no guarantee of returns in equity mutual funds and not just in equity mutual funds but also in equity as an asset class. That said, volatility can be guaranteed. This is what we have been witnessing in recent times. But this in no way means that you won’t be earning anything. However, the returns that you earn will depend on various factors such as investment made via SIP or lump sum when you had initiated your investment, whether you are a disciplined investor or not, what your risk appetite is and the investment horizon.

As said earlier, returns from equity mutual funds can’t be guaranteed, but in the long term the probability is that they can beat inflation and most of the fixed income investments. Long term can be termed as an investment horizon of above five years. The reason for the same is that equity mutual funds invest in companies expecting that the shares of the company will increase in tandem with profits. This usually factors in inflation with the diverse nature of businesses. Therefore, we can expect to earn better inflation-adjusted returns from equity mutual funds.

A decade ago, fixed income investments used to give about 10-12 per cent returns, whereas equity was giving on an average 20-22 per cent returns. However, as we advanced further, we started witnessing a falling interest rate scenario. If this situation loiters for long, the ensuing inflation course over the long run would aid investors to earn about 10 per cent from equity funds. The current situation seems ugly though. However, this is a ‘one of a kind’ scenario. No one can envisage how companies will respond to this disruption. You can, however, reduce the risks by diversifying across asset classes and investing via SIP. With proper asset allocation and rebalancing in place, investors can have better inflation-adjusted returns.