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  • Invest in US-focused equity funds to counter the impact of depreciating rupee

    Quote by Rajeev Thakkar in The Economic Times, July 9, 2016

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    Invest in US-focused equity funds to counter the impact of depreciating rupee
    Amid an uncertain global financial environment, US-focused equity funds offer good returns aided by the foreign exchange advantage of a strengthening 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. Or is it? Let's see what a US-focused fund can bring to your portfolio.
    Insure your portfolio
    With historical annualised return in excess of 15 per cent 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 and, even though India has its share of high-quality, high-growth 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," remarks Vidya Bala, Head, Mutual Fund Research, FundsIndia. 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 per cent compared to the Sensex close to 12 per cent. Over five years, the Nasdaq, in rupee terms, generated a whopping 21 per cent against the Sensex's meagre 7.5 per cent. Over three and five years, the appreciation in the dollar has added 14 per cent and 51 per cent, respectively, to the actual returns from US-centric equity funds.
    Invest in US-focused equity funds to counter the impact of depreciating rupee
    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, says Rajeev Thakkar, Chief Investment Officer and Director, PPFAS Mutual Fund. He manages the , which takes upto 35 per cent exposure to foreign equities. "For individuals who expect to incur some dollar-based expenditure in the future, owing to children's higher studies or otherwise, the underlying currency exposure from US-focused funds can prove beneficial," says Thakkar. Such individuals can allocate up to 20 per cent of their portfolio to US equity funds. Others may limit their allocation to around 10 per cent 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 horizon 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 per cent after indexation.

    Invest in US-focused equity funds to counter the impact of depreciating rupee

    Where to invest
    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 per cent. 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.

    The original article could be seen here.

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