Each time investors recognise that the Indian stock market will not always keep moving up, they start asking, “should I include international mutual funds in my portfolio for diversification?” This is not a “yes/no” question and like practically all questions in personal finance, is best answered with a question: If you invest in international mutual funds are you ready to appreciate pros and cons and actively manage your portfolio suitably?
Sadly, investors look at the US market rising when the Indian markets are swinging sideways and assume “some exposure” to US stocks/ETFs will help them get a better return. Wanting a “piece of the action” is neither diversification, not risk management. Let us go over this step by step.
How much international equity exposure would make a difference in my portfolio? If you truly understand the answer to this question, the issue of whether to hold such stocks or funds will be settled once and for all. Let us consider a familiar creature: the aggressive hybrid fund or what was previously known simply as balanced funds.
These must hold at least 65% of Indian equity, and typically there is little or no arbitrage involved. Meaning almost at all times, they contain at least 25% (usually 30%) of bonds. The portfolio is rebalanced to said asset allocation once a month – something a retail investor would never do independently.
Now consider the returns made by large cap funds in 2008. The highest return (or lowest loss) was -45%. In the aggressive hybrid category, it was -36%.
25-30% bond exposure (regularly rebalanced) helped reduce losses due to a global market crash by 20%
There are two lessons here: (1) If you want international equity to make a difference in your equity portfolio a little exposure (read 5-10%) will neither soften market blows significantly nor will it boost returns (as the tax rate is higher). You need at least 20-30% exposure. (2) Such exposure should not be left alone. If Indian equity shines, and international equity does not, you should be ready to rebalance.
For example, suppose you start with 40% bonds, 35% Indian equity and 25% international fund and after three years the allocation changes to 39% bonds, 41% Indian equity and 19% foreign equity, will you rebalance or wait for it “recover”. Most investors fearing tax will not. Such an approach will negate the benefits of such diversification.
Also, international equity exposure should be mean genuinely international exposure, not just US or European or Chinese equity, etc.!! It has to be genuinely diversified across developed markets and emerging markets. I had earlier identified two such funds:
- Edelweiss Emerging Markets Opportunities Equity Offshore Fund (4.4% return since July 2014, inception)
- Invesco India Feeder- Invesco Global Equity Income Fund (4% return since May 2014, inception)
Are you ready for true international diversification, or do you want a piece of the currently tasty pie without understanding implications? Don’t you think you would have done better with safe Indian fixed income like an FD or RD?
As long as we have small savings schemes not affected by the capital markets, there is no need for international mutual funds or gold in the portfolio. Most investors do not understand the basics of managing such portfolios and are better off without such exposure.
Those who claim gold or international equity will offer better diversification should also quantify such statements with their portfolios. Such quantification is not hard but will take some effort. Causal investing is a waste of time.
Check out: My Handpicked Mutual Funds July 2019 (PlumbLine)
Disclosure: I hold PPFAS Long Term Value Fund. Currently (June 2019), it contains about 20.3% of US stocks, another 8.6% from elsewhere (Japan, Switzerland), so a total of 27.82%. Since this is about 32% of my retirement portfolio, my effective international exposure is only about 9%, which is next to nothing. I like PPFAS because of its lower volatility. When the US markets crash, I think the fund will be tested. So do not jump in unless you are mentally prepared.
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video! ⇐ More than 1000 investors and advisors use this!
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 2800 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 675 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
My new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)Free android apps
- All calculators from our book, “You can be Rich Too” are now available on Google Play!
- Install the Financial Freedom App! (Google Play Store)
- Install Freefincal Retirement Planner App! (Google Play Store)
- Find out if you have enough to say "goodbye" to your employer (Google Play Store)