Reduce country-specific risk with foreign funds

They protect you against rupee’s long-term tendency to depreciate against foreign currencies

Most Indian equity investors have a strong home bias, with the bulk of their investments being concentrated here. When the Indian economy is doing well, they ride the feel-good factor and believe their future is taken care of. But when the economy gets caught up in a slump, as is the case now, many begin to wonder if they should diversify their bets.

Experts feel investors need to make their portfolios geographically diversified and reduce country-specific risk. Says Neil Parag Parikh, chairman and chief executive officer (CEO), PPFAS Mutual Fund: “India-specific events like demonetisation, border tensions with neighbours, etc. can hamper the Indian portfolio, but the overseas portfolio remains unaffected by these events.”

Investing internationally also gives investors access to great businesses. Says Ajit Menon, CEO, PGIM India Mutual Fund: “The Indian equity market is worth just $2 trillion, while the global market is worth about $87 trillion. Many good, highly-innovative businesses in various sectors are only available in the global markets.”

Investing abroad also leads to currency diversification, since the feeder funds available in India invest in an underlying portfolio denominated in a currency like the US dollar. Says Menon: “This reduces portfolio volatility. Moreover, the long-term trend has been one of the rupee depreciating against the dollar, which adds to the returns of these funds.”

Today, Indian investors invest in a variety of global brands — Apple,

Samsung, etc. Says Parikh: “If we are such avid consumers of foreign brands, then we should also benefit from the fact that they are great investments.”

Investing directly in foreign equities is difficult since most lay investors do not have access to adequate information about these stocks. The regulatory compliance is also more complex. Most retail investors will find it easier to invest in international fund-of-funds or exchange-traded funds (ETFS) offered by mutual funds. Some Indian funds (like PPFAS Long-term Equity) invest both in Indian and foreign equities. They maintain exposure of over 60 per cent to Indian equities and are taxed as equity funds. Pure international funds are treated on a par with debt funds for taxation purpose.

Have a horizon of at least five years when investing in global funds. Use the SIP route to benefit from both currency and market volatility. If you wish to invest country wise, opt for US funds first. Says Gaurav Rastogi, founder and CEO, Kuvera, a mutual fund platform: “The US accounts for about 66 per cent of global equity market capitalisation. US funds have historically had a low 34 per cent correlation with Indian stocks, so you get diversification benefit. And they are priced in US dollar, so they provide a hedge against rupee depreciation.” After this year’s strong run-up, however, existing investors in these funds should rebalance.

Allocate at least 10 per cent of your equity portfolio to international funds. Says Menon: “If you have or could have expenses in a foreign currency, increase your exposure to 15-20 per cent.”