On 1st December, Kalpen Parekh, CEO of DSP Mutual Fund tweeted the allocation of his fresh investments since 2017 (of his personal money). In it, he mentioned that as much as 23% of his fresh investments were in funds investing outside India (fund of funds or FoFs). India’s July-September GDP growth has come in at a 6 year low of just 4.5%. Its nominal GDP growth was even more dire. At 6.1% India’s nominal GDP is the lowest in the past 20 years. Corporate profits are tied to this latter figure and hence your equity mutual fund returns will also be several impacted by the slowdown. The effect is strongest in mid and small caps which have more tied to the domestic economy and have fewer earnings from outside India. The average return of small cap funds in India over the past year is -0.86% and the average return of mid cap funds is 4.32%. This compares poorly to the 10.16% given by the more global facing large cap companies.
The latter however already trade at hefty valuations. However there is a set of mutual funds which is almost entirely insulated from the sharp fall in India’s GDP - international funds.
International funds based out of India, invest in most of the world's major geographies including the USA, Europe, Japan, China and even Brazil. Some are thematic, investing in commodities or mining company stocks from around the world. International funds which are denominated in rupees, can be purchased and sold like any mutual fund in India. They are not counted as foreign assets for tax purposes and investing in them is not subject to the $250,000 dollar limit under the RBI’s Liberalised Remittance Scheme (LRS). However their value will fluctuate as per the rupee’s movement against foreign currencies. For instance, a US fund will appreciate in value if the dollar rises against the rupee and vice versa. International funds are taxed in the same manner as debt funds. They are taxed at a 20% rate with indexation if the fund is held for more than 3 years. If held for 3 years or less, the funds are taxed at your slab rate. The following 3 international funds are part of the Mint 50 list of mutual funds. You can access the full list here.
1) Franklin India Feeder Franklin US Opportunities Fund
Launched in 2012, the fund has more than Rs1,000 crore of assets under management and has delivered a return of 17.13% since inception. As the name suggests, the fund ‘feeds’ into the Franklin US Opportunities Fund which in turn counts Amazon, Microsoft, Mastercard, Visa and Alphabet among its top holdings. The fund’s one year return is 21.9% return.
2. ICICI Prudential US Bluechip Equity
This fund launched in June 2012, has delivered 16.83% (CAGR) since inception. It invests directly in frontline US stocks such as Amazon, Intel, Kellog and Caterpillar rather than feeding into another fund. It’s one year return is 20.18%.
3. ICICI Prudential Global Stable Equity Fund
This fund is country agnostic, and suitable for those who are not sure which market to choose - US, Europe, Japan or emerging markets. It feeds into Nordea Global Stable Equity Fund. Its returns over the past 5 years at 8.14% CAGR have been modest.
Even if GDP growth in India revives, it will not always be the world’s fastest growing economy. Hence for diversification reasons alone, you should have some allocation to international funds. Financial planners recommend an allocation of upto 15%.