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Why there has been a 3-fold increase in the number of investors flocking to international funds

Mutual funds that invested in US equities delivered solid returns in the last two years. Now, data compiled from the Association of Mutual funds of India (AMFI) website shows that the total number of retail investor accounts or folios in overseas schemes of Indian mutual funds have almost tripled over the past year. But what exactly drove investors to international investing? Here, we explain why Indian investors preferred global funds in search of better opportunities. It is also important to know that international investing doesn’t mean just US-based stocks.

Number of retail folios nearly triple

Data from AMFI shows that the total number of retail folios in international mutual funds rose to 3.7 lakh as of September 2020, up from 1.3 lakh a year ago. That’s a rise of 192 percent. Not surprisingly, equity and gold exchange-traded funds (ETFs) also saw a sharp rise in the number of retail folios – 146 percent and 115 percent, respectively. In the last two years, international funds and gold schemes attracted significant investor attention. But the rise of retail folios in international funds is the highest among MF categories over the last one year, in pure percentage terms. In absolute numbers though, international fund folios pale in comparision to equity schemes as categorised by AMFI.

International funds (also called overseas or global funds) are offered by Indian mutual funds. These schemes invest in foreign companies listed in overseas stock exchanges. They offer you a variety of funds that invest predominantly in the US, Europe, Japan, Brazil, China, Asian and emerging markets. Theme-based international schemes focusing on agriculture, mining and real estate sectors also form a part of their offering.


US market rally attracted investors

Over the past few years, while Indian equites just about kept their heads above water, select global markets, including the US performed fairly well and rewarded investors handsomely. For instance, the Nasdaq 100 index, which tracks some of the most actively traded American companies, delivered an outperforming return of 39 percent and 27 percent in 2019 and YTD 2020, respectively.


“US Equity markets have been one of the strongest major markets in the world in the last one year as a result of a confluence of factors such as lower interest rates, higher liquidity, lack of growth (and growth visibility) available elsewhere and being home to a host of truly global companies, especially on the technology side,” explains Srinivas Rao Ravuri, CIO, Equities, PGIM India MF.

Financial advisors also started suggesting diversification to global markets. Parag Parikh Long Term Equity has consistently invested around 27 percent of its assets in international equities, despite this being its flagship fund. Experts say that a portion of our portfolios, if invested in international markets, can smoothen out the volatility of our portfolio returns as, historically, US and other global equities have moved in different directions.

A weak rupee against the dollar boosts returns

Diversifying to dollar-denominated assets provides a leg-up to your portfolio when macro risks loom large. One such risk is the continuing spread of COVID-19. Operationally, if the rupee depreciates vis-à-vis the dollar, the return from the scheme will be higher and vice-versa.

For instance, the rupee was stable in the range of 70.50-72.50 from Sep-2019 to Feb-2020. But the sharp sell-off triggered by the coronavirus outbreak saw the Rupee depreciating to 76.90 by April from where it has recovered to the current levels of 74. Year-to-date, the rupee has depreciated more than 4 percent. This has also helped overseas funds to generate higher return.

Financial advisors also cite this reason as to why parents must invest a portion of their children’s’ education fund in international assets.

“Over the last 35 years, the rupee has depreciated by an average of 6 percent annually. So, for parents looking at sending their kids for education, investing in international assets makes immense sense to beat rupee depreciation,” adds Srinivas Rao Ravuri.

US-focused funds deliver the most

All international funds do not invest in the US markets. Infact there are several international funds that invest in other countries and regions and quite a few of them have given modest returns or even made losses in this year.

Funds that invest predominantly in the US market (for instance, Motilal Oswal Nasdaq 100 FOF and Franklin India Feeder-Franklin US Opportunities) or funds that allocate major portion to US stocks (for instance, PGIM India Global Equity Opportunities fund) have recorded mouth-watering double-digit returns.

Pratik Oswal, Head Passive Funds, Motilal Oswal AMC says, “The US equity market has been performing well over the last decade. The biggest companies (especially technology) have outperformed and added most value in terms of market cap. The current COVID-19 crisis has extended their dominance, as a huge part of the world population still works from home and is forced to adopt technology tools and cloud computing. US businesses also tend to be the most global in nature and hence are making the most of global diversification of their business models.”

These funds help Indian investors to buy stocks of companies that are otherwise not available in India.

‘DSP World Gold Fund,’ which invests in the world’s leading gold mining companies and ‘Edelweiss Greater China Equity Off-shore fund,’ which invests primarily in companies that are domiciled in the Greater China region delivered handsome returns during the period.

On the other hand, funds investing in agriculture and energy businesses and regions such as Europe, Brazil and Japan have seen a slump in their fortunes. HSBC Brazil Fund, for instance, suffered because of a crippling economy due to the COVID-19 crisis.

More than half of the overall AUM for a single country

The assets under management (AUM) of US-focused funds zoomed and registered an almost four-fold increase over the last three years.

“Over the last 10 years, MSCI All Country World Index (in Rupee terms) has delivered annualized returns of around 14.3 percent vs Nifty at 8.4 percent. Overall, emerging markets have underperformed US indices, which led to significant increase in AUM of US-based funds, as a virtuous cycle of better performance attracting higher inflows kicked-in,” Srinivas Rao Ravuri says.

Adds Oswal, “Unfortunately, the money in equity markets tends to chase past performers. India’s equity markets have been disappointing over the last 3-4 years and hence a lot of investors are now looking at investing abroad.”

International funds are ideal for investors with a penchant for higher risks. Retail investors should be careful while selecting these funds. You can allocate 5-10 percent of your portfolio to such schemes with a holding period of five years or more.