Do international mutual funds still make sense for Indian investors? Simply save

Subscriptions to international mutual funds have tapered off over the past two years due to tepid returns delivered by global equity markets, a cap on overseas investment by mutual funds and changes in taxation.

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The dwindling demand is particularly marked since it comes after the tremendous growth overseas mutual funds saw, starting January 2020.

Data available with ACE MF, a mutual fund research tool, showed that at the end of January 2020 there were 33 overseas funds available in the Indian market with total assets under management (AUM) of Rs 7,598 crore, jumping to 66 funds at the end of September 2023 with an AUM of Rs 47,850 crore, an over sixfold surge.

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However, much of this growth came during the first 24 months of this period. The AUM of these funds had stood at Rs 48,278 crore as of December 2021-end. Further, only 10 funds were launched during the January 2022 to September 2023 period.

This shows that mutual funds investing in overseas funds have hit a wall in the last 20 months or so, beginning January 2022.

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On the returns chart, while international mutual funds are up 22 percent on a one-year basis till September end, their performance has been bad on a longer-term basis. Over a three-year period, these funds have given 5 percent returns, while 10-year returns are 6 percent, which are lower than some of the debt funds.

What has gone wrong with overseas mutual funds and do they still belong in an Indian investor’s portfolio? Moneycontrol talked to Chintan Haria, head-investment strategy, at ICICI Prudential Asset Management Company for answers. Here’s a summary of what Haria said.

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• International funds started to gain attention two-three years back as the Nasdaq 100, the technology-led index in the US, did exceedingly well. The term FAANG stocks (Facebook, now Meta, Apple, Amazon, Netflix and Google, now Alphabet) gained prominence. But because of the slowdown after 2022, there is less interest in such funds because the returns have been weak. More importantly, from an Indian mutual fund’s standpoint, the cap of $7 billion on overseas investing was hit in January 2022.
• During two years between 2021 and 2022, Indian investors invested $3-4 billion in international schemes, and the overall mutual fund industry’s cap of $7 billion was hit and, hence, fresh flows into international funds had to necessarily cease.
• Because of the sharp rise in interest rates in 2022 and 2023, there is uncertainty and economic slowdown happening in Europe and the US. China too is slowing down, which is natural because its population peaked last year. India is looking as a bright spot while the rest of the world seems to be slowing down.
• The GDP growth in developed economies such as the US and Europe has not been very strong. Hence, the returns for the last 10-12 years have not been that strong. China for the last five years also has seen a slowdown, and currently is staring at stagflation. So the economy not doing well or the GDP growth being stagnant are the major reasons why in the last 10 years the returns have been looking weak.
• Developed economies may not see strong GDP growth going ahead. So, returns from such economies may not be that significant.
• The decade between 2000 and 2010 was one of emerging markets where economies such as China, India, South Korea and Taiwan, among others, did well. Conversely, during 2010 to 2020, it was the developed markets that did well because interest rates came down drastically and their markets did well. Our belief is that 2020 to 2030 should again be the decade of emerging markets.
• So, effectively, investors are better off being in Asia and emerging markets, relative to Europe and the US, with India being one of the strongest economies.
• If investors are looking at diversifying their investments outside because the large part of their businesses and investments are in India, and they are completely aligned towards India, then they can look at gold and overseas investing as options.