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Friday, December 2, 2016

US focussed Mutual Funds

Given an uncertain global financial environment, US-focused equity funds offer good returns compounded by the advantage of a strong dollar
Brexit seems to have pushed global uncertainties to a new high. In such a scenario, stepping out of the domestic market could appear a tad adventurist. Is it? Let's see what a US-focused fund can bring to your investment portfolio.


With historical annualised return in excess of 15% over 15-20 years, Indian stock markets have satisfied long-term investors. However, the slowdown over the past few years has shown that these returns cannot be taken for granted. And, even for those who believe that the Indian economy is about to turn a corner, continuing to ignore the US market may not be a wise move. Having some dedicated exposure to US equities will provide a buffer to your portfolio. The US is home to global corporate giants. Even though India has its share of high-quality, highgrowth businesses, none offer the kind of global reach and scale as some of the US multinationals-Google, Facebook, Apple, Microsoft, among others.

The single biggest reason, however, for you to consider a US-focused fund is to negate the impact of a depreciating rupee on your portfolio. Heightened global uncertainties are likely to further strengthen the dollar which is seen as a safe haven. When you invest in a US-focused fund, besides earning returns from the equity market, you also benefit from the currency market--given the likelihood of a strengthening dollar and weakening rupee.Consider how the benchmark index Sensex has fared relative to the US benchmark index Nasdaq in rupee terms. Over three years, the Nasdaq has clocked 15% compared to the Sensex close to 12%. Over five years, the Nasdaq, in rupee terms, generated a whopping 21% against the Sensex's meagre 7.5%. Over three and five years, the appreciation in the dollar has added 14% and 51%, respectively, to the actual returns from US centric equity funds.

While on the one hand, the depreciating rupee will hurt your finances owing to higher price of crude oil and other commodities, your dollar-denominated portfolio will offer you some protection. It is essentially a partial insurance for your entire portfolio. For in dividuals who expect to incur some dollar based expenditure in the future, owing to children's higher studies or other wise, the underlying cur rency expo sure from US focused funds can prove beneficial. Such individuals can allocate upto 20% of their portfolio to US equity funds. Others may limit their allocation to around 10% of the overall portfolio.

Bala insists, however, that investors should not get too adventurous with these funds, and hold them for the long term. A longer time hori zon is advisable for these funds since these are not tax-efficient, if held for the short term. Any gains realised within three years of purchase are added to income and taxed at the applicable tax slab. Gains realised after three years are taxed at 20% after indexation.


The choice of a US-focused fund, as is the case with domestic funds, is critical. Bala reckons investors seeking US exposure should do so through a Nasdaq-focused product, since it mostly comprises technology-related firms, whose global exposure is tilted towards the emerging markets. It does not include financial and investment firms. The Motilal Oswal MOSt Shares Nasdaq-100 ETF provides direct access to this index. Being a passively managed fund, it also carries a lower expense ratio of 1%. This is the only fund with a five-year performance track record. The actively managed funds in this arena, such as the Franklin India Feeder US Opportunities Fund, Kotak US Equity Standard Fund and DSP BlackRock US Flexible Equity Fund are mostly feeder funds--invest in an offshore parent fund--and carry a much higher expense ratio. ICICI Prudential US Bluechip Equity and Reliance US Equity Opportunities are actively managed funds that invest directly in US stocks and could be possible investment options.

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