DSIJ Mindshare

Choose Foreign Funds For Portfolio Diversification


Q1: I am a long-term investor with an investment horizon of more than five years. At present, all my investments are in mutual funds that invest in Indian equity. Should I invest in mutual funds that invest in the international markets? Kindly advise me as to what value addition I can expect by investing in foreign funds.

- Devesh Jaitak

A: In recent times, there has been increased focus on foreign funds due to their significant outperformance as compared to domestic funds. Of course, the excitement is also due, in part, to the underperformance of our domestic equity and the depreciating rupee.

However, keeping the foreign exchange gains aside, there are definitely many reasons to invest in foreign funds. Major value additions to the portfolio would be from geographic/economic diversification and also by creating dollar assets. While there are not too many meaningful foreign funds available, one can look at funds that directly invest in foreign equity, for instance MOST Shares NASDAQ-100 ETF from Motilal Oswal as well as ICICI Prudential US Bluechip Equity Fund.

There are also emerging market equity funds available for investment. Though these provide geographic diversification, one may find a high correlation with Indian equities.

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Q2: I have a fairly diversified portfolio of equity funds, and I have been investing through the SIP route regularly for the past four years. My portfolio consists of the following funds:

  • HDFC Top 200
  • HDFC Equity Fund
  • Reliance Growth Fund
  • IDFC Premier Equity Fund
  • Birla Sun Life Dividend Yield Fund

Do you recommend that I add an international fund to my portfolio for higher returns as the rupee is currently weak?

- Ravi, Bengaluru

A: I admire your discipline in maintaining your equity SIP even though the market has been going through so much uncertainty over the past few years. I am sure that all the cost averaging that would have happened will be beneficial, as we seem to have reached a bottom on the pessimism. The PE values are below the long-term average, factoring in a low growth rate in the coming year too. So, any disappointments are not expected to shock the markets much anymore.

The depreciation of the rupee was expected, but the extent caught many by surprise. Further, as is typical with many analysts, the pessimism was extrapolated in a straight line. However, the rupee depreciated not just because of its weakness, but largely due to the dollar’s appreciation. Most currencies across the world have depreciated against the dollar in the recent past, as investors adopted a risk-off approach and repatriated investments to the US in a move to safety. Given our current account deficit, we were impacted a little more.

While we as a country are going through a period of lower-than-anticipated growth and a political log jam, the tendency is to look elsewhere for returns. This is especially since the US markets recovered and delivered positive returns at a time when the Indian equity markets were negative.

In the past one year, the NASDAQ 100 Index has delivered a return of about 10 per cent (in dollar terms). Motilal Oswal’s MOST NASDAQ 100 ETF has delivered remarkable returns of about 38 per cent (in rupee terms) during the same period. This significant outperformance was due to the rupee depreciation.

One can reap the benefits of diversification only when the asset classes in the portfolio have a low correlation. The correlation between the Indian and US markets show that on a long-term basis, over five and 10 years, the correlation is around 0.30 and 0.23 respectively (as per Credit Suisse and ICICI Pru MF). So, you should look at having exposure to foreign funds as a value addition to diversification, with the objective of reducing the volatility in your portfolio. Also, if you are planning for your child’s education abroad or are planning for an international tour as one of your goals, creating dollar asset would be advised as you are eliminating the risk of forex.

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