International funds have topped the charts in terms of returns delivered by capital schemes of all shades. These funds returned one-year returns of 16.29 percent on average, compared to a mere 0.51 percent managed by large-cap capitalization schemes, according to Value Research. Clearly, good returns are attracting investors to the virtues of global investing. The top performing international fund returned 65 percent in the past year. Twenty-four funds delivered a one-year return of more than 10 percent. But seven funds actually had losses. What is the lesson? Not all international funds are the same.
Not only FAANG
If you’re under the impression that investing in an international equity fund means indirectly owning a share of Facebook, Amazon, Apple, Netflix, and Alphabet (formerly Google), or popularly known as FAANG shares, you’re wrong.
All international funds do not invest in the United States. You get many options that invest in various countries, regions and sectors or themes. These schemes focus on stocks that are listed in the US, Japan, Brazil and China. You can also invest in European, emerging market or Asia-Pacific stocks. You can choose schemes that invest in gold farming, energy, or mining stocks. Each of these has a different risk reward associated with it.
Schemes that invested in gold miners stocks performed well, while schemes that invested in emerging markets, especially in commodity-focused economies, failed. For example, DSP World Gold Fund gained 65.31 percent in the past year. During the same time period, HSBC Brazil Fund lost 23.41 percent. Brazil has the second highest number of coronavirus cases in the world.
International funds have assets worth Rs 7.1 billion under management. Among the top five in terms of assets, four are invested in US stocks and manage a portfolio of Rs 4284 crore. Prateek Pant, Co-Founder and Head of Products and Solutions, Sanctum Wealth Management recommends diversifying overseas fund investments into USA, Europe and emerging markets. Sankaran Naren, executive director and Chief Investment Officer of ICICI Prudential AMC, told Moneycontrol that the rise in US stock prices is nearing its peak. Investors should consider foreign investment as a means of diversification.
Diversification over returns
Investments abroad allow investors to take advantage of businesses that are not available in the Indian stock markets: Internet search engines, e-commerce, social media, electric vehicles, semiconductors, etc. Not all economies grow or contract simultaneously.
“Investors should consider investing in international funds for diversification,” says Vishal Dhawan, Founder and Head of Financial Planning, Plan Ahead Wealth Advisors. Instead of being carried away by past performance in the short term, investors should have a term of more than five years.
If you build an uncorrelated investment portfolio, there is a good chance that you will get healthy long-term risk-adjusted returns.
Diversified vs. sectoral schemes
Diversified offerings are considered less risky. Industry offerings like DSP World Gold Fund can be very rewarding for investors if they can schedule the entry and exit on the right. But these are not for naive investors.
PGIM India Global Equity Opportunities Fund joins the PGIM Jennison Global Equity Opportunities Fund. The underlying fund invests in a concentrated portfolio of around 35-45 shares or American Depository Receipts (ADR) from companies around the world, including names like Amazon, Apple, Adyen, Shopify, Tesla, and Netflix. The fund has returned 50.77 percent in the past year. As with national funds, diversified international schemes, particularly those focused on the United States, are better.
Active or passive
Investors can search for passive options, such as index funds that track stock indices in foreign markets. It has index funds to track the S&P 500, Nasdaq, and Hangseng. “In developed markets, given the efficiency of information, it is relatively difficult to beat benchmarks consistently over the long term. Therefore, for capital investment in developed markets like the US, it is preferable to invest through index funds, ”says Nitin Shanbhag, Principal Investment Products, Motilal Oswal Private Wealth Management. In April 2020, Motilal Oswal had launched an index fund that tracks the S & P500 index.
Active funds may work best for investors looking to invest in emerging markets. “Investors should consider deploying up to 10 percent of their surplus in international capital schemes through a systematic investment plan or systematic transfer plan,” says Dhawan. Be sure to stay for at least five years. Global funds are treated like debt funds when it comes to taxes. Profits from units held for more than three years are taxed at 20% after indexing.