International mutual funds: Should I invest in them?

Published: August 3, 2019 at 11:15 am

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:

  1. Edelweiss Emerging Markets Opportunities Equity Offshore Fund (4.4% return since July 2014, inception)
  2. 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.

Do share if you found this useful

How to profit from content writing: is our new ebook for those interested in getting side income via content writing. It is at available at a 50% discount for Rs. 500 only!
Did you know? We have more than 900+ videos on YouTube to explore! Join our YouTube Community!

Use our Robo-advisory Excel Template for a start-to-finish financial plan!

Join our courses in exclusive Facebook Groups!

  • 520+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). 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 how to achieve by showcasing your skills and building a community that trusts you and pays you!
  • Goal-based portfolio management! Join 2125+ members and 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 of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content)  in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.

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 the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements write to pattu [at] freefincal [dot] com
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 one million readers a year (2.5 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
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished 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 Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new 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