International equity is the worst performing mutual fund category in the last one year. Data from Value Research shows that the category sits at the bottom of the performance table with -2.83% return during the one-year period (as on February 21).
The worst performing international funds are those that invest in China, Asian and emerging markets. US-focused funds have done comparatively better. For example, Nasdaq 100 funds have delivered around 5% return in one year.
During the same period, Indian equity funds have done much better. For example, largecap funds have delivered 15% and flexicap funds have given 18% return.
Lowest return delivering funds:
|
Fund |
1-year return |
3-year return |
5-year return |
|
International |
-2.83 |
10.6 |
8.95 |
|
Sectoral: Banking |
5.16 |
10.98 |
9.48 |
|
Sectoral: Pharma |
10 |
25.18 |
12 |
|
Largecap |
15.48 |
17.22 |
14 |
|
Sectoral: ESG |
16.7 |
18.32 |
14.28 |
Source: Value Research | Returns as on February 21
The massive underperformance, as per experts, is due to an eminent correction in developed markets after a record rally post covid, especially in the US. They say Fed's rate hike announcement and the Russia-Ukraine crisis have acted as triggers for the correction. Apart from these, there are country-specific issues that have impacted Asian markets. For example in China, government restrictions on tech companies and the Evergrande crisis have been the local issues pulling the markets down.
"Till sometime back, the low interest rates and high liquidity were driving global markets higher. But now the scenario has changed. The Ukraine tension and the changing interest rate scenario have brought about a major correction, leading to a slump in the performance of international funds," said Viral Bhatt of Money Mantra.
"If you look at the past decade (2011-2020), the US market outperformed the Indian market, driven by a rally in tech stocks, mostly the FANG. This overvaluation had to trigger a correction some day and it is happening now. Fed's interest rate decision and the Ukraine crisis have triggered this correction," said Rishabh R. Adukia, chief advisor, Ninecube.
What should investors do?
As equity investments are meant for the long term, poor performance over a one-year period shouldn't be a cause of panic, say MFDs. The 3-year and 5-year performance of international funds are still on the better side at 10.6% and 9%, respectively.
"If you have taken a position, you should stick to it. The returns will pick up once there is clarity on interest rates and the geopolitical issue stabilises. MFDs should review the asset allocation of clients and trim international exposure only if it's too high," Bhatt said.
"If one wants to diversify or is looking for a hedge against rupee depreciation, then they can invest 15-20% of the portfolio in international schemes. The horizon, of course, has to be long term because the market is likely to remain volatile in the near-to-medium term," Adukia said.
Restrictions on international investment
International investment through mutual funds is anyways difficult at present. Most international mutual funds have stopped accepting fresh inflows post a SEBI circular in January. The restriction was a result of industry nearing the foreign investment limit of $7 billion. Now, fund houses are awaiting a hike in the international investment limit to restart accepting fresh investment.
