Three reasons why should you invest in international mutual funds

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International mutual funds 

New Delhi: Indian equity markets fell sharply on Monday the BSE Sensex and the Nifty fell sharply (nearly 3.5% each) as rapid surge in fresh Covid infection cases raised fears of lockdown. However, other global markets did not perform as badly as Indian market. Financial advisors are recommending clients to hold 10-20% of their portfolios in international equities as a hedge against the vagaries of the domestic market so that a part of their portfolio remains insulated.

Global funds invest in companies with exposure to larger markets, with cheaper access to capital and with cheaper valuations compared to their Indian peers. Here are three reasons why one should invest a part of their equity portfolio in international mutual funds.

1) Low correlation with India:  Indian markets have lower correlation with international markets. According to a report by Mirae Asset Mutual Fund, Indian markets have a low correlation of 0.16% with the US, 0.32% with Europe and 0.38% with China. So by investing in international mutual funds that invest in the above-mentioned markets, your overall portfolio risk will be less.

2) Exposure to new-age stocks: International funds give investors several opportunities in new age industries like ecommerce, social media, electric vehicles, cyber security and cloud computing among others. Amazon, Netflix, Facebook, Twitter, Louis Vuitton, Walmart and Tesla have been outperformers over the last few years. So by investing in International funds you can get exposure to these stocks.

“Many global companies have strong moats and competitive advantages that many Indian companies lack. Investing in them gives an automatic hedge against the rupee,” the Economic Times quoted Bhavesh Sanghvi, CEO, Emkay Wealth Management as saying in a report. Sanghvi recommends Invesco Global Consumer Trends Fund and PGIM Global Equity Opportunities Fund.

3) Geographical diversification: Investing in international funds gives you geographical diversification. It may so happen that Indian economy may not perform due to some domestic factors but other global economies may perform. In such a situation, investing in global funds gives you geographical diversification.

“Low correlation with Indian markets, opportunities to own companies in several new-age industries, and geographical diversification are some reasons to invest overseas,” the business daily quoted Harshvardhan Roongta, principal financial planner, Roongta Securities as saying.

Roongta believes investors can allocate to funds like Motilal Oswal Nasdaq 100 and Motilal Oswal S&P 500 Index Fund in addition to PGIM India Global Equity Opportunities.

“Investors could allocate 10-15% of their portfolios to global funds,” Harshad Chetanwala, co-founder, MyWealth-Growth told ET. He believes investors could opt for a mix of two funds –one that gives them exposure to Asian Equities and another to technology overseas. Some funds that focus on Asia are Edelweiss Emerging Markets, PGIM India Emerging Markets Equities and Franklin Asian Equities.

Worth mentioning here is that many Indian investors have already invested in international MF schemes. Assets in international schemes available through domestic mutual funds have seen a sharp rise over the last one year. The number of folios rose 250% to 7,00,000 in March 2021 as against 2,00,000 in April 2020. During the same period, the assets under management rose 278% to Rs 12,408 crore from Rs 3,282 crore, the business daily mentioned in the report.

But given the sharp rally that has happened over the last 1-2 years, some believe investors must be cautious while investing in international funds.

“International investing should not be a fad given the new names and themes that are on offer. Given that global markets too have seen a sharp rally, investors should build portfolios to geographically diversify for the long term and avoid rushing at one go,” S Shankar, CFP, Credo Capital told the business daily.