US Funds a good option now

                                    





As investors are likely to have dollar-based liabilities, they should put in a part of their equity portfolio in these funds.

                                      

The Chinese stock market crash, com pounded by the Eurozone's Greek debt crisis, has seen investor confidence shatter. However, the US continues to hold out hope for those interested in foreign markets. With seven US-focused mutual funds offering diverse investment routes--direct with active fund management, fund-of funds and ETFs--Indian investors have several options to chose from.

Why invest in the US?

The US is the world's largest and most developed economy. It also has the world's largest equity market. At $23 trillion, its market cap accounts for 36% of global market capitalisation. The US is also home to some of the best companies in the world. A quarter of the Fortune 500 companies have their headquarters in the US. Indian investors can also get exposure to unique investment themes, such as aerospace, semiconductor, consumer technologies, e-commerce, etc, not available in the domestic market.Also, the correlation between the CNX Nifty and the S&P 500 Index has been very low--0.29 over the past 10 years. The low correlation between the Indian and US equity markets results in more effective diversification of the Indian investor's portfolio. A low correlation effectively means that the Indian market and the US mar ket are less likely to dip at the same time.

Having exposure to both markets lowers your portfolio volatility. For in stance, if you had invested in the Sensex, your standard deviation--a measure of volatility--over the past 10 years would have been 25.65%.But if you had constructed a portfolio with 80% weight in the Sensex and 20% in the S&P 500 Index, the standard deviation would have been just 17.74%.

The likelihood of the rupee depreciating against the dollar is another reason to invest in the US market. Between July 2000 and June 2015, the Indian rupee depreciated by a cumulative 42% against the US dollar. Many Indians will have dollar-based liabilities in the future. Investors will aspire to have their children study in the US or they may want to travel to the US. It will be helpful for such investors to invest in a US fund. Being invested in dollarbased assets will protect your portfolio from the rupee depreciation.If you are building your interna tional portfolio country-wise, and not via a diversified in ternational fund, then the US market should be your top priority.

Drawbacks and risks

After several years of outperformance, valuations in the market are no longer cheap. The US economy is also in the later phase of its business cycle. Even if corporate profit margins do not revert to their historical mean, the current valuation levels appear stretched

Currency movements also pose risks. The strengthening of the dollar against many of the world's currencies could affect corporate earnings in the US as almost 40% of the sales of S&P 500 companies are from abroad. Then, though unlikely in the long-term, If the ru pee strengthens against the dollar, your returns from a US-focused fund would be affected. Also, since all the US-focused funds have more than 65% of their portfolio invested in foreign funds or shares, they will be treated at par with debt funds for tax purposes in India. Which means you'll need to stay invested for at least three years to avail of longterm capital gains benefit.

What should you do?

Despite the markets' elevated val uations, Indian investors should have some exposure to US funds in their long-term portfolios. Economic momentum has continued to accelerate over the past three years. And the US is one of the few global economies whose GDP growth rate economists have remained consistently optimistic about. Investors should invest via SIPs and have at least a five-year horizon to overcome the risk arising from high valuation. Allocate 5-10% of your equity portfolio to these funds.

 

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