Should advisors recommend international funds?

With the rupee’s continuing fall against the dollar, investors in international funds are making a killing. The Indian rupee has depreciated 22% against the US dollar since January 2013.

International fund of funds which invest in overseas funds have delivered an average of 19% (as on 31st August) absolute return in one year, shows Value Research data. It’s not just the falling rupee which has helped these funds. The US market has done well as compared to the domestic markets. The S&P 500 index is up 16% YTD while the BSE S&P Sensex is down 5% during the same period.

Domestic diversified equity funds on the other hand are not doing well. Among sectoral funds, banking and infrastructure funds have lost the most at -13% and -17% respectively. (Returns as on August 31, 2013) though, technology funds which invest in IT companies which derive a major portion of revenues from overseas markets have delivered 31% absolute return in one year

With Rs 2068 crore assets under management, international fund of funds are yet to gain wider acceptance among advisors. There are two reasons for the slow take off these funds. Firstly, advisors believe that Indian markets can offer much better returns compared to overseas markets. Secondly, advisors believe that it is better to invest in markets which you are familiar with and fully understand.

However, many advisors recommend putting aside some money in such funds.

“We have always been recommending international funds to our investors. We advise investors to take an exposure as a part of their asset allocation strategy. Investors with an aggressive risk profile and a time horizon of around three years can consider investing into global funds. Here investors should not be lured by the performance being delivered by these funds on account of depreciation of the rupee but rather look at the future potential of these funds in terms of the growth of the country/countries that these funds invest into,” said Rajesh Krishnamoorthy, Managing Director, iFAST Financial.

So, what should you look for in international funds?

 “It is advisable to invest in funds which offer broad and familiar investment themes like gold, US equities, etc., compared to those with niche themes. Another factor investors should consider when investing in such funds is the expertise of the AMC in managing the theme. Typically, foreign AMCs with their global presence and availability of a track record for the parent fund (in which the domestic feeder fund would invest in) are usually the preferred choice for investors.We would recommend investors to consider US equities and agriculture themes at this point in time,” said Pankaj Sharma, EVP & Head - Business Development and Risk Management, DSP BlackRock Investment Managers.

Himanshu Pandya, Senior Vice President & Head of Products, ICICI Prudential Mutual Fund says that ICICI Prudential US Bluechip Equity Fund which collected nearly Rs 50 crore from the NFO has reached Rs 105 crore now. “Indian investors should invest in developed markets because they have already invested in an emerging economy like India. Some of the best known businesses are not available for Indian investors,” said Himanshu.

On the other hand, some advisors feel that it is not the right time to invest in international funds as the rupee may strengthen from here. “Most of the rupee’s depreciation has got captured in the fund’s performance now. It is unlikely that these funds would continue to do well because rupee may strengthen. It is better to avoid investing in markets which you don’t understand,” said Vinod Jain, Principal Advisor, Jain Investment.