The Mutual Fund Show: Here’s How Mutual Funds Can Help You Diversify Globally
Investing in international funds can provide access to global investments, achieve diversification and hedge against a falling rupee.
That’s according to Radhika Gupta, chief executive officer at Edelweiss Mutual Fund. “International funds are part of a mutual fund basket,” Gupta said on BloombergQuint’s weekly series The Mutual Fund Show. “Just like getting access to international products such as phones, automobiles, etc, mutual funds provide access to international investments.”
International funds give investors exposure to a wide range of global firms ranging from technology behemoths like Alphabet, Facebook and Alibaba to automakers such as Suzuki Motor.
Here are some Indian mutual fund schemes with international exposure
Parag Parikh Long Term Value Fund
The fund invests in securities across the world and has returned 17 percent compounded for the last five years.
ICICI Prudential U.S. Bluechip Equity Fund
This fund focuses on the U.S. market and has generated an annualised return of 10.3 percent over the last five years.
Franklin Asian Equity Fund
This scheme invests in Asia-Pacific companies, excluding Japan, and has a five-year compounded growth of just over 8 percent.
But, Tarun Birani, founder of thinkingman.in, an investment advisory firm, said an investor should be well-versed with equity investing in the domestic market before venturing into other geographies as they not only come with country risks, but also currency risks.
Gupta also struck a note of caution. “Just like no asset class is the best performer each year, no geography performs best every year.”
While Gupta advises allocating 5-10 percent of investible funds to international investments, Birani recommended a 10-15 percent exposure.
Here’s how you can use mutual funds to invest in international businesses
Do you also believe that while India is great to invest in, it might not hurt to get some global exposure?
Radhika Gupta: Diversification is a very powerful construct. If you look at most investors in any market, and I spent most of my career overseas, very few HNIs (high net worth individuals) would say I want a portfolio in a single country.
In India, the international fund story perhaps has not taken off as it should have for whatever reasons. I do believe in the power of diversification—5-10 percent of one’s portfolio allocation to another geography. There are many reasons why one should do it. That’s a powerful construct for any investor, especially when it’s not hard to do.
Gupta: There are three reasons—access, diversification and currency. While we talk about the great Indian consumption story, a lot of what we consume is foreign. Your phones like Apple and Samsung are foreign companies. Also, foreign cars like Honda and e-commerce sites like Amazon. Getting access to these companies as a standalone investor through your brokerage account, investing overseas, choosing a single stock is hard and an international fund solves this problem.
Second, there is diversification. We often say that no single asset class is the best performing every year. In 2014, in dollar terms, Indian equities were the best-performing asset class. In 2016, they were the worst and U.S. equities were one of the best-performing asset classes. In 2017, China was one of the best-performers. Just as no single asset class, debt or equity, is the best performing, no single geography is the best performing, which is the argument for diversification.
Third is currency hedge. The rupee naturally depreciates a certain amount a year. International funds offer diversification to a declining rupee. Many of us may have expenses in dollars in the future, like if you want to send your kid abroad for education. You plan to save up to $100,000 today. But because of the declining currency it may not be adequate a few years down the line. So, invest in dollars.
How do you explain this method? If I want to send my kid after 15 years to study in the U.S., then how will investing in an international fund help me?
Gupta: An international fund benefits from the fact that the rupee depreciates. All your other investments are in rupee. When you park money in an international fund, you park Rs 1 lakh or Rs 1 crore or whatever it is, it gets converted into dollars, gets invested in dollars and stays in dollars. When you need it back then you get it in rupees. So, you are benefiting from the rupee’s depreciation, which is 2.5 percent a year on a historical basis.
Would you say that this is for people with specific needs or anybody who is looking at a complete mutual fund portfolio with debt funds, hybrid and balanced funds or pure equity funds in India. In order to complete the bouquet, an exposure to international fund may be a necessity?
Gupta: Yes and no. Certainly, it is for people who have the need and they have global expenditure. It is not the first thing you are going to do when you have mutual fund investments.
But, if it is a complete part of the mutual fund basket, then yes, absolutely. Just like fixed income is a part, it’s a complete part. International funds are not well understood. But thanks to mediums like this, before investing in it, work with an adviser and thoughtfully decide what market you are going to invest in, what fund you are going to invest in and what are the risks.
Before you make any investment in life, you should be confident about why one is investing and what one is investing. Because you don’t understand the Chinese market as much as you understand the Indian market. So, when you are doing it, do it with an adviser and go with what you are doing and why you are doing it.
Would there be an option for Indian investors to invest in funds that invest only in the U.S. or invest in the U.S. and other economies too? Are there any specific funds?
Gupta: The Indian international fund market now covers 80 percent of the world’s geography in terms of availability. Our own basket does it. So, industry-wide you actually cover a wide basket.
At what stage should any investor think of having an exposure to international funds through whichever route?
Tarun Birani: First, Like any other investment, diversification is very important. No country’s equity can deliver the same kind of returns. We have a lot of data to back it every year. The top performer keeps changing. It is very important for an investor who does long-term parking of funds. He needs to be diversified across geographies.
In 2016-end, there was demonetisation. That event has taken a toll on the domestic economy. If somebody had invested outside India, then demonetisation would have not affected him. It is the one big rationale for looking at international investing.
Second, you are able to participate in global companies like Google, Apple, Microsoft, which today sitting in India with domestic equity you can’t have. 15-20 percent of their revenue comes from the U.S. and 80 percent globally. So, one can participate through this route.
Third, Indians are always progressive about their kid’s education and funds are required to be parked outside India. For that, somebody may require money after 10 years. That is also the way to look at international funds because everything is available to you there in dollar. So, you are participating in the dollar rally that way.
Is it a light rule that you should invest in international funds after you have satisfied all options available?
Birani: There is no rule. First, get yourself invested in domestic equity. Get yourself firmly rooted there. You need to understand equity clearly because in terms of international equity, apart from country risk, you are exposed to currency risk also. So, you should be aware of the concept of equity. Once you are clear on that part, and have 3-5 years experience, and if you have sizable money parked, 10-15 percent of your portfolio in global equities could be something which could be looked at.
There are beautiful ways to participate in global investing options. One is, the Reserve Bank has allowed $2.5 lakh under LRS (liberalised remittance scheme). So, any investor can participate outside directly. To start, you can open a foreign broking account outside India.
Is maintaining an account an expensive affair?
Birani: I don’t think it is expensive but the problem is around the knowledge part. I don’t think many investors have that kind of knowledge and understanding of it. The better route could be international funds available in the market.
For international funds, you can participate in three ways. The funds which have local fund managers managing equities outside India. That could be a typical fund wherein all investing options are selected by Indian fund managers only and invested outside India. It is 100 percent owned by it.
Second could be options under which there is a fund in Luxembourg, Mauritius or somewhere and you invest in that fund. There is no direct investing happening from India.
Third, since there is taxation disadvantage in terms of investing in international funds today because they are considered more than 35 percent invested outside India in a fund, it falls under a debt fund option which leads to you debt taxation. So, after three years your money will be available for indexation.
The likes of Parag Parekh come under a typical equity fund, but they are 25 percent outside India. There are funds like Templeton India Equity Income fund and all those funds which are investing outside India.
You can participate in international funds with themes like mining, gold and region-specific themes like Japan, China, Brazil. So, you can participate in the country that you are bullish about.