Investors embracing International Mutual Funds amid domestic market downturn. Should you take a dive?
In recent months, Indian investors have shown a growing interest in international mutual funds as a means of diversifying their portfolios. This shift comes amid significant global market volatility, driven by changes in US trade tariff policies and geopolitical tensions. The domestic market, jolted by foreign institutional investors reallocating capital from India, has seen many mutual fund categories experiencing notable losses over the past six months. International mutual funds present an opportunity for investors seeking to cushion their portfolios against such domestic market instabilities by tapping into high-growth sectors abroad.
The appeal of international mutual funds lies in their ability to expose investors to different currencies, which can be advantageous if the Indian rupee underperforms. Additionally, these funds offer liquidity, enabling investors to buy or sell investments with relative ease.
However, global markets tend to be more volatile than their domestic counterparts, resulting in potential fluctuations in investment values. This inherent volatility poses both risks and opportunities, as it can lead to significant gains or losses in a portfolio’s value.
“In the last 6 months, global funds have outperformed domestic markets. This outperformance has been largely driven by FIIs moving their investments to markets like China and the U.S. In the last week of September 2024, China announced a stimulus package to boost its economy, attracting significant attention from FIIs. Post November, after the US election, a lot of inflow happened in US markets as well with speculations on the US’s first policies of Trump,” said Chirag Muni, Executive Director, Anand Rathi Wealth Limited.
What should investors in India do?
In the last six months, international mutual funds have outperformed other categories. The global funds category, comprising 67 funds, recorded an average return of 14% over the past year. Besides the international fund category, only the mid-cap and multi-cap categories experienced average double-digit returns.
Muni added: “When it comes to international funds, it’s not recommended to invest in such funds, particularly based on the recent rally, as the recent rally in global funds like China-based ETFs and Nasdaq funds has largely been driven by liquidity rather than any significant structural improvements in fundamentals.”
He further added: “When we look at the long-term performance of global markets, the U.S. and Indian markets have shown better efficiency compared to China and Japan. Hence, if you are considering investing in international funds, it is wise to choose funds with significant exposure to the US market.”
Diversification with Limited Exposure
Muni said: “We don’t recommend investing in international funds but if one looks for global diversification in the portfolio can explore only up to 5 -10% of overall portfolio. Investors can consider investing across the range of domestic diversified equity funds to get exposure across the range of categories and sectors to generate good alpha and returns in the long-term.”
Nasdaq Composite Index
Among the international indices, the Nasdaq Composite Index stands out, especially for those interested in technology stocks. As a bellwether for the tech sector, the Nasdaq Composite includes major tech giants like Apple, Microsoft, Amazon, Alphabet, and Meta, contrasting with the New York Stock Exchange, which features a broader industry spectrum. The Nasdaq-100 Index, a subset of the Nasdaq Composite, specifically tracks the top 100 non-financial stocks on Nasdaq, further highlighting its technology and consumer discretionary focus. This concentration has historically driven strong performance but also makes it susceptible to economic cycles and interest rate changes.
For Indian investors, mutual funds that track the Nasdaq-100 offer a unique opportunity to invest in some of the world’s most innovative companies. By leveraging these funds, investors can partake in the growth of firms that are at the forefront of digital transformation and innovation. This approach enables them to diversify their portfolios beyond the limitations of local markets, aligning with global technological advancements. However, it is essential to remain mindful of potential risks tied to economic fluctuations and market volatility inherent in such investments.