Should investors consider international schemes as part of investment portfolios?

The year 2011 was not a good one for investors in the Indian equity markets. While the Sensex and the Nifty returned -24% for the year, the average returns by diversified equity mutual fund schemes ranged from -23% to -25% depending upon the market capitalisation exposure from large caps to mid and small caps.

With India turning out to be one of the worst performing markets in 2011 - under performing not only the emerging markets of Brazil, Russia and China, but also developed economies like the US and the UK- equity schemes with investment exposure in these foreign lands ended up generating far superior gains than their domestic peers.

Positive gains in the range of 6% - 8% accrued to schemes like Birla SL International Equity-A, Fidelity Global Real Assets and JP Morgan JF ASEAN Equity last year while others like Franklin Asian Equity, Sundaram Global Advantage and Principal Global Opportunities generated marginally negative returns ranging from -1.6% to -2.6%. Though negative, these returns were better than the double-digit negative returns posted by the domestic equity schemes.

Off the above, Birla SL International Equity and Franklin Asian Equity are direct mutual fund schemes, meaning that these invest directly in the stocks of international companies while the others are feeder funds, ie, they invest in foreign equity through other, usually their parent international mutual fund schemes that are managed overseas.

Also, while Birla SL International Equity-A is a pure international equity mutual fund, Franklin Asian Equity gives investors a taste of both domestic as well as foreign equity within Asia.

Glance at their portfolios and one will find investment in stocks of some of the popular international companies that many investors would crave to own, like, Coca Cola (US), Wal-Mart (US), Apple (US), Nestle (Switzerland), Visa (US), Samsung Electronics (South Korea) and Hyundai Motor (South Korea) among others. The annual returns from these stocks in 2011 ranged from 5% to 43%, which not many Indian companies could have flaunted last year.

This brings us to a million-dollar question -should investors consider these international schemes as a part of their investment portfolios? If yes, what is the desirable exposure one needs to have in these global funds? The golden rule of investment says -never put all eggs in one basket, the more diversified is the portfolio, the better are the chances of minimising losses. Considering this rule, some exposure to international funds does not appear to be a bad idea, especially if one were to consider the performance of global indices vis-a-vis Indian indices in both good and bad times.

For instance, despite Indian equities being amongst the better performers globally in years 2006 and 2007, the Chinese equity market returned far superior returns in comparison.

Again, though USA was the crux of the financial crisis in 2008, the Nasdaq returns of - 40% turned out to be superior to the Nifty's - 52% in that year. Even the stupendous recovery one witnessed in India in 2009 with Nifty clocking 75% gains was belittled in comparison to the gains made by the equity markets in emerging economies like Brazil (83%), Russia (126%) and China (79%).

These comparisons do make a strong case for Indian investors to consider international schemes as a part of their investment portfolios. But having said that, one cannot be oblivious to the fact that the Indian economy is not only one of the stronger domestic consumption economies in the world, but also has a forecasted GDP growth rate of about 7%, second only to China.

The biggest drag for the Indian economy last year was high interest rates and inflation that prevented investments in the capital sector and dragged down corporate financials. However, with interest rates showing signs of easing, one may expect liquidity to flow back into the economy and push growth. Also, any progress by the government on the policy front, as is being anticipated from Budget 2012, is expected to be extremely positive for the Indian equity markets.

In the event of these expectations coming true, Indian markets may eventually turn out be one of the better performers in 2012, justifying investment in Indian equities with a medium to long-term perspective.

It may thus be prudent to conclude that though investment in global schemes is desirable, the exposure to these schemes should be limited to the extent of diversification and providing a hedge to one's investment against volatility and uncertainties of the Indian equity markets.

Source: http://economictimes.indiatimes.com/features/investors-guide/should-investors-consider-international-schemes-as-part-of-investment-portfolios/articleshow/11851362.cms?curpg=2