Over the past several years, diversifying your portfolio with international equities or funds would have paid off well. As investors gained from the rally in the overseas (mostly US) markets, the size of international funds has grown substantially. Over the past one year, the top three funds have delivered 97 percent returns. But the bottom three funds have given just 26 percent on an average.
So, how do you choose the right fund among 46 international schemes?
Don’t rely on past returns
DSP World Mining Fund, a scheme that invests in equity shares of gold-mining companies, gave 95 percent return over the past one year. It’s among the five best international funds over this period. Guess its 10-year return? Just 2 percent!
Of the 14 international funds that have a 10-year performance record, only four have delivered annualized returns greater than 10 percent.
HSBC Brazil Fund was launched with great expectation nearly 10 years ago. Its performance languished for a good part of that period. As of August 2020, it was down 23 percent. Brazil has the second highest number of Coronavirus cases in the world. Its economy and stock markets have been badly impacted.
A fund investing in Greater China Equities or US tech stocks could have delivered returns in excess of 20 percent annually, had you invested five or six years ago. But countries go through their own cycles of boom and bust and that may not coincide with how the Indian economy or markets perform.
Look for diversified portfolios
Just as with investments in Indian equity funds, for overseas schemes, too, it is important that you buy and hold for at least 5-10 years. However, experience shows that if you simply buy the flavour of the times today, even long-term returns may not be much.
Still, you must diversify geographically. Choose well-diversified portfolios and investment themes when it comes to international funds. For example, globally diversified schemes or those investing in broad-based US equities or European stocks can be considered. Such portfolios will have a large and liquid basket of listed securities for portfolio construction.
Schemes that invest elsewhere in Asian or emerging markets should come next.
The last in line are thematic and sector based international funds. These are the riskiest and are cyclical in nature.
Before you zero in on the fund…
Check the pedigree of the scheme and the fund house. Analyse the consistency in delivering returns. Typically, avoid new fund offers unless they offer a geography or theme that is new.
International funds also act as a long-term hedge against Rupee depreciation. However, overseas funds are not for first-time equity or mutual fund investors. Only after you have accumulated experience in market-linked investing, should you look for diversification through these schemes.
Whatever your reason for picking an international equity fund, it’s not a ‘one size fits all product.’