The Mutual Fund Show: Why Investors Need Global Equity Exposure

GAURAV RASTOGI: So, let’s break it down into two or three different parts. Let’s say the first part is, who should invest in international funds? Ideally, everyone should have an international allocation in their portfolio. Allocations are percentages of your portfolio so it doesn’t matter how big your corpus is. Someone who’s doing a Rs 5,000 SIP versus someone who’s doing a Rs 50,000 SIP versus someone who’s doing a Rs 5 lakh SIP, as a percentage of your portfolio, if the minimum requirements are allowed by a fund, then you should think international investing for multiple reasons. I’ll just give you a quick rundown on why one should think about this. The biggest of course, is diversification. We usually look at S&P 500 and what we find is, over the past 20 years, the 3-year rolling correlation which basically means S&P 500 and Nifty 50, do they move together or how much do they move together? So, assets which move together don’t add diversification to your portfolio. Assets that don’t tend to move together, add diversification to your portfolio. So, what we find is, that the three-year average correlation in the last 20 years is about 30-34%, which is kind of what is the correlation you will find between G-Secs and Nifty 50 as well. So, it does provide you a diversification.

Second is, if you think about the MSCI global index I mean sometimes we have said this before too that if an alien lands on earth, and has no idea about what India is, what U.S. is and wants to own an index portfolio, by default they’ll end up owning 66% of the U.S. market because that’s the weight on the MSCI World Index. By the lottery of birth, we are born Indians it does not mean that we have to have disproportionate investments in India. There’s a term for this, it’s called home bias. The tendency for investors to disproportionately invest more in their home country assets or assets that they know best. So, these are some of the reasons. The U.S. companies generate about 29-45% of their incomes from abroad. So, a diversified portfolio gives you global exposure, helps you avoid this home bias too. So, pretty much, everyone should have an international exposure.

Coming to the second question, who is actually investing and how much they are investing. So, that’s very interesting for us to look at the data too. On average, what we find is that across all the portfolios roughly about 5.5% of the portfolio is allocated to international exposure and majority is through mutual funds. Is this the right amount? That’s very hard to say, our math says that the allocation should be somewhere in the 10-20% range. In the past we have recommended roughly about a 13% allocation to international assets that is going back to 2017. What are people investing in, is again very interesting. Both the questions and also your observation that there has been a flux of international funds recently have to be looked through the lens of what have international funds done in the recent past. Whether you look at Nasdaq whether you look at S&P 500, the returns have been really good. Fund houses are seeing that, investors are also seeing that. So, we do see that Nasdaq 100 fund is very popular as an asset from Motilal, it is one of the oldest Nasdaq 100 funds out there. That’s very popular that users invest in. When we first recommended international funds in our portfolio that’s back in 2017, I think our choices were limited to four or five in order which also a couple of them were sectoral funds. There was the DSP Mining Fund which is a pretty old fund, there is a DSP Agriculture Fund which is also a very old fund. If you look at broad market funds, I think Franklin used to offer one and Franklin still offers one I should say. So, Franklin offers one and ICICI offers one. Our recommendation was the ICICI Prudential U.S. Bluechip Equity Fund.

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