International funds are among the top performing mutual fund categories in the last three months. The category has offered an average return of 16.49% during the period. These funds occupied the second slot in the performance chart, shows Value Research data. Only solver funds performed better than the international fund category. Surbhi Khanna of ETMutualFunds spoke to Anil Ghelani, head – products & passive investments, DSP Mutual Fund, to understand what is fuelling the uptrend and what are the prospects of these schemes. She also asked him how new investors should use international schemes to diversify their portfolio. ” These unique offerings also allow investors to clear uncorrelated asset portfolios and reduce their portfolio volatility. Our advice to investors is to not try to time many of these opportunities and utilize the SIP route with a steady allocation to diversified equities themes,” say Ghelani.Edited interview.
International funds have performed better in the last three months. Is it because of uptrend in the US market?
Yes, in the last three months we have seen a good uptrend in global equities, led by the US. The US equities had witnessed deep correction from end 2021 to Oct’22, with Nasdaq down nearly 33%. Its PE ratio based valuations declined from a peak of about 36 times to 22 times. Over the last few months markets have seen a bounce back from deeply oversold readings. The European and other emerging market stocks have also seen a sharp recovery. This has contributed to steady performance of international funds over the last few months. Within overall global equities, some sectors did exceptionally well, such as the Gold mining equities which saw about 20% rise in the last three months.
Lower-than-expected inflation and possibility of small rate hikes are helping the markets. Will the trend continue?
It does appear that peak inflation is now behind us. We had argued in July 2022 that inflation may have peaked and will see an accelerated pace of decline from November 2022 onwards. It does appear that the trend of falling inflation and central banks dialling back their hawkishness could continue for next few months. However the market would be more keen on growth trends from this point forward.
DSP offers a few international funds. What is your advice to investors in these schemes?
We believe that international funds offer attractive diversification opportunities. Also, a number of strategies which provide exposure to natural resource and gold mining equities in particular offer investors a chance to participate in investment opportunities which are not easily available in India. These unique offerings also allow investors to clear uncorrelated asset portfolios and reduce their portfolio volatility. Our advice to investors is to not try to time many of these opportunities and utilize the SIP route with a steady allocation to diversified equities themes.
International funds offer a wide range of options to investors. However, investors are not aware of these options and risk-reward ratio. What’s your view?
There are differentiated offerings in international investing space. They include gold mining equities, natural resource sector like metals & mining, diversified equity and country or region specific exposure, innovation & technology, agriculture, sustainable energy and asset allocation funds. The range of these strategies allow investors to access sectors which are not available in domestic listed space as of now. We believe that since many of these themes are deeply cyclical, investors often end up participating when the recent returns are high. This is counterproductive. The first filter that investors should use to judge these strategies should be the valuation of these sectors, the lower the more attractive. And then investors should take comfort from low recent returns whenever available. This will allow them to benefit from full cycle in these strategies. If global markets do well, international funds will once again breach the investment limit and stop accepting money. What’s your view?
When value of the global investments is rising, investors only benefit from the gains but it can never result in breach of limits. This investment limit is based on capital flows in and out of India, so it is tracked on a purchase cost basis. Hence while value of international funds rise up, the limits will be impacted only by incremental fresh flows, net of redemptions. While certain segment of international funds investing in global stocks or active funds had hit the limits last year and temporarily stopped accepting money, a few international funds investing through the ETFs route have remained open through out and continues to remain open even today.
What should be the strategy of investors, especially new investors, getting into these schemes?
The best course of action is to allocate, based on their financial goals, a part of their portfolio allocation through the SIP route. For lumpsum investors, they should probably take a deeper look at valuations and be careful in purchasing based only on past 1 year or recent returns.