The mutual fund industry witnessed a record Rs 76,000 crore of inflows into new fund offers (NFOs) in 2021. Given the sharp run-up in equity markets, there was a strong preference for dynamic asset allocation funds, but the interest in international funds was also interesting to note. There are a few reasons for this interest and why we think it could sustain.
The majority of the Indian retail investors have home-based bias, and hence most of their investments are in India. While India has outperformed the broader emerging markets over the last two years and will continue to offer a multi-generational wealth creation opportunity, there could be periods where domestic markets could underperform. Also, there are similar growth or unique investment opportunities in some other parts of the world. For example, over the last decade, in US$ terms, the S&P 500 has delivered total returns of 372 per cent, among the highest globally, higher than India or China. It is not to suggest that the S&P 500 will outperform over the next decade, but a diversified strategy offers investors additional exposure to global markets.
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While diverse, India’s sectoral mix is domestic consumption-oriented (higher weights towards staples, discretionary and financials) and thus relatively less influenced by global growth cycles than some other markets like Korea, Taiwan, or even Russia. Some investors may want exposure to sectors like metals, semiconductors or mining, and the opportunities therein may be limited in India’s investible universe. From this perspective, it may also warrant exposure to international or global funds.
Another interesting aspect is a more profound desire to understand and invest in the new-age tech stocks. While listing these stocks is a relatively new phenomenon in Indian markets, it is already an existing feature globally, such as in the US and China. In India, many new-age tech companies may be in the early habit formation stage, but they have already scaled up substantially in the US or China. The top five companies in US, namely, Apple, Microsoft, Amazon, Google and Tesla, are all based on a solid tech backbone. A few of these new-age tech stocks have grown consistently faster than the market in terms of topline and have shown strong execution. Thus, investors see much merit in adding these stocks to their portfolios. An easy way for a retail investor is to participate in global technology funds or similar vehicles.
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Environmental, Social and Governance (ESG) is also emerging as an essential factor. While still in a nascent stage in India, ESG investing is already an evolved concept in Europe, US and Japan. Investors wanting to incorporate a pure-play ESG based investing strategy would also do well in global ESG funds.
A key factor has been that the average age of the new investor is less than 30 years. Hence, there is certainly more awareness about global trends, such as investing in new-age tech, which may be early in India but is already seeing exploding growth elsewhere. A young investor may want to gain exposure to a fintech in Korea or Brazil. Therefore, gaining exposure to these markets may also help investors add alpha to their portfolios.
Global equity investments should be looked at from a strategic long-term investment perspective. So, when some are not doing well, do not lose sight of the overall portfolio. All stocks and funds cannot do well at the same time. International funds offer an added layer of diversification. The allocation to international funds would ideally function the client’s risk profile. Someone with a likely exposure abroad (e.g. planning for children’s education) might want the higher allocation to international funds as this could provide a hedge against a sharp fall in INR currency. However, we typically suggest that at least 10-20 per cent of a client’s equity assets be invested in international funds over the long term. There are limited options when it comes to one single global fund. Hence, it might be better to invest separately in the emerging US and European markets.
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The author is the Chief Business Officer of WhiteOak Capital Asset Management
(DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)
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