International funds will gain from weak rupee

Investors of international equity funds, especially those that invest in US equity markets, have seen an increase in their returns over the last one month, due to the weakness in the rupee. In general, the dollar has been appreciating against multiple currencies, including the rupee. But these gains are marginal and a should not be the only reason for investing in an international equity fund, say experts. 

According to Vidya Bala, Head of Mutual Research at FundsIndia.com, the decision to invest in international equity funds should not be based on currency movement. It should be based on need to diversify your portfolio and hedge your portfolio by investing in markets that have low co-relation with Indian markets. "Investors do look to gain from currency movements by investing in international funds. But that involves high risk. The right way is to bet on currency itself, and not the market. Because by doing so, you may end up taking a wrong call on both the market and currency," she says.

The US market is currently doing well and will definitely give better returns in the near term, as it will not be as volatile as the Indian equity market. But over a longer term, that is five year period, Indian equities will definitely give better returns, Bala adds. 

According to data from Value Research, over a six-month period the returns from international funds are second only to pharma funds. They are higher than large cap, mid-cap and small - cap funds. But over a one to three year period, equity diversified funds have given higher returns, while returns from international funds are higher only compared to gold funds. 

Investors can look at international funds as a diversification provided they have sufficient exposure to Indian equities, says Raghavendra Nath, Managing Director, Ladderup Wealth Management. "If rupee depreciates it is better for international funds. It means you are getting more returns for your money," he says.

Even European markets have a low co-relation with Indian markets, but it is a high risk market compared to the US. If you want to add high-risk, high-return stocks to your portfolio, then some pockets of emerging markets are also an option to consider, Bala adds. 

The rupee has depreciated by almost 1.5% since the beginning of December 2015. With the US Federal Reserve likely to increase interest rates, it is expected that foreign investors will sell investments in emerging markets, including India. This outflow of funds, if it happens will put further pressure on the rupee.