This post has been written by Kaustubh Belapurkar, Director of Fund Research at Morningstar Investment Adviser India. It initially appeared on Moneycontrol.com.
International funds, from an Indian investor’s perspective, have been a little bit of a hit and miss.
Global fund investment options albeit limited have been around for a decade, with options to invest into US, Europe, ASEAN, country specific funds like Brazil and China and even funds investing into natural resources companies like gold mining companies or energy companies.
The greatest amount of investor interest has typically been in gold mining funds and U.S. funds. In fact in 2013, when the Indian equity markets where going through a prolonged lull phase, domestic equity funds too were witnessing stagnating growth.
At the time investors increased allocation into U.S. funds on the back of strong 1-year historical returns of these funds. Post that, though the story has been very different, with the start of the domestic equity market rally in 2014, domestic fund flows are reaching new highs, but Global funds are witnessing a slow trickle of redemptions.
As an effect of this global funds currently forms a minuscule proportion of investor’s portfolio at 0.28% from a high of 1.56% in January 2014.
Why invest in international funds?
Investors should consider adding international funds in their portfolios from the perspective of diversifying risk in their portfolios.
Investments should be made for the long term on an overall portfolio allocation basis rather than a decision based on short term historical performance.
By adding international funds in your equity portfolio, you can potentially reduce the overall volatility in your portfolio by as much as 5-10%.
It is important to acknowledge that markets go through cycles and no market will be a top performing market year after year as is visible in the table below.
In addition, Indian markets display a lower correlation with developed markets like the US, thus the addition of such exposures helps reduce overall portfolio volatility.
Calendar year index returns
Another factor to consider is the ability to take exposure to sectors or companies that you would ordinarily not have exposure to.
Global Companies like Amazon, Google, Facebook, Coca Cola, etc. are widely known and used brands in India, they derive a fair share of the revenues/users from countries such as ours. By investing in these funds, you can potentially gain exposure to such stocks.
Investors should certainly think about adding an international flavor to their portfolio and stay invested for the long term. You can consider investing 15-20% of your overall equity exposure into global funds.
