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International funds gain on rupee fall, commodity gain

Ashley Coutinho / Mumbai 05 Oct 17 | 01:24 AM

Illustration: Binay Sinha

International funds have emerged the best-performing ones in the past month, with rupee depreciation and a rise in commodity prices propping their returns.

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Average category returns for the past month have been 3.6 per cent, higher than all other categories, including diversified equity funds. The benchmark Sensex on the BSE exchange slid 0.1 per cent in the month.

Within the international category, investors have a few choices and they need to look at the country and theme to assess if a particular fund is suitable, say experts.

Funds focused on energy and commodities, for instance, have fared well in the past month, thanks to the run-up in commodity prices, giving absolute returns of between 6.5 per cent and 11.3 per cent. However, over a one-year period, these funds are at the bottom of the pile.

Funds that invested in the US gained in the past month, primarily due to the depreciation of the rupee against the dollar. For a one-year period, emerging market and European funds have topped the return chart, from 18 per cent to 25 per cent.

Developed markets are seeing signs of revival, with the US and Europe seeing a rise in economic growth, said experts. The US economy grew faster than expected in the second quarter, its quickest pace in a little more than two years. The US president recently proposed a tax overhaul that includes lowering the corporate income tax rate to 20 per cent, to boost the economy.

On the other hand, expectations about India's economic growth rates have moderated. "There is merit in putting money in developed markets at this point, with US funds having a slight edge over European funds, owing to better growth prospects for the former," said Manoj Nagpal, chief executive of Outlook Asia Capital. He suggests those with a bias for emerging market funds could shift some money to developed markets, especially if having no exposure to the latter.

According to experts, investing into themes such as energy and commodities could add a layer of cyclical risk to one's portfolio, in addition to currency and geographical risk.

International fund investors need to assess two parameters before investing. The first is the prospect of the country, region or theme the fund will invest in. The second is the stability of the currency one invests in. Diversification into different geographies, not currency play, should be the chief reason for investing into these funds. Financial planners recommend setting aside five to 10 per cent of one's portfolio for feeder funds.

Currency play, if at all, should be used with a specific goal in mind, said experts. For example, if you plan to send your child to the US five years from now and expect the rupee to depreciate five per cent every year, adding US funds to your portfolio might be a good idea.

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