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Given the rout in the markets, should you sell your international mutual funds?

Moneycontrol logo Moneycontrol 18-05-2022 Nikhil Walavalkar
Given the rout in the markets, should you sell your international mutual funds? © Moneycontrol Given the rout in the markets, should you sell your international mutual funds?

Equity markets around the world have been roiled of late. The Nasdaq-100 in the US is down 26.48 percent from its November 2021 peak. Many stocks have done worse, mostly on account of the US Federal Reserve hiking interest rates. This has burned many Indians who have put money into international funds that invest in US stocks.

How bad is the fall in international funds?

The US is a key market that is home to several of the biggest names in the tech world. These companies benefited from the high rate of digitisation in the wake of the pandemic, which was reflected in their stock prices. But many of these shares fell almost as quickly as they rose. Stocks such as Netflix and Paypal Holdings have lost 68.85 percent and 58.20 percent, respectively, since the beginning of this year, for various reasons.

“Though earnings growth in tech stocks was strong, the valuations of some tech stocks were stretched. Rising interest rates have pulled down such richly valued stocks,” says Niranjan Awasthi, head, product, marketing, and digital business, Edelweiss Asset Management.

Since the beginning of the year, while large-cap funds primarily investing in Indian stocks had lost 9.71 percent as on May 13, as per Value Research, international funds lost 16.66 percent over the same period and technology funds were the worst hit. For example, Edelweiss US Technology Equity Fund of Fund lost 37.96 percent.

“Investors saw technology services in demand during the pandemic. The easy money made many speculate in technology shares, especially in developed markets. But as interest rates rise and easy money dries up, the prices of these overvalued technology stocks and mutual funds focusing on them are falling,” says Deepak Chhabria, founder and managing director, Axiom Financial Services.

Another pocket that saw big losses is Chinese stocks. For instance, Mirae Asset Hang Seng TECH ETF has lost 26.25 percent in CY2022. “Slowing economic growth, regulatory crackdowns on some businesses and the recent lockdown to curb Covid-19 infections have led to correction in prices of stocks in China,” says Sahil Kapoor, equity strategist, DSP Mutual Fund.

Higher interest rates take a toll

Rising interest rates have a gravitational effect on growth stocks. If the rates go up, the price an investor would like to offer for a growth stock goes down, other things remaining the same. If the rates go down, the valuation multiples expand. If a company disappoints on earnings growth in a quarter at a time interest rates are rising, investors are quick to sell it.

“In a high inflation and rising interest rate scenario, small investors save less as they have to pay more to maintain their lifestyle and to service their existing loans. Accordingly, their ability to invest goes down and in turn brings down the demand for stocks,” says Chhabria.

Stock markets initially turn volatile when interest rates go up but settle down later. “Market develops comfort with rising interest rates as time passes, growth stocks in the technology sector tend to do well. Tech stocks did well in the period 2013-2017 despite interest rates moving up,” says Awasthi.

Should you continue your global investments?

If you are worried about your existing investments in international funds, do not hit the panic button and rush for the exit. Figure out how much of your money is allocated to these funds. If you are overinvested in these schemes, it makes sense to cut your exposure. Even while selling, consider exiting those theme funds you do not understand or have a view on. You can hold on to the diversified index funds.

Elsewhere, savvy investors are looking this as an opportunity but cannot tap into it due to mutual funds being banned from investing in shares listed overseas. That leaves the option of either investing in units of exchange-traded funds (ETFs) or in a fund of funds buying into units of ETFs listed overseas.

“Investors should consider investments in diversified indices such as Nasdaq and structural sectors like semiconductors with a long-term view in a staggered manner and avoid chasing themes purely looking at past returns,” says Kapoor.

For an average investor looking for diversification, the S&P 500 index can be a better bet.

If you intend to buy units of an ETF that buys stocks listed overseas, be careful, some of these may be trading at a significant premium to the net asset value. For the more savvy lot, investing in ETFs listed overseas directly using one of those online overseas platforms can be a way out. But watch out for high transaction costs. You also need to make that important choice about the product that fits you best, and not invest anywhere.

Vijai Mantri, co-founder and chief investment strategist, JRL Money, however takes a cautious stand and advises against investing overseas in a hurry. “First invest in Indian equities through mutual funds, as the domestic fundamentals, be it inflation outlook, quality of the corporate balance sheets or the outlook on corporate earnings growth, are best placed among most large-sized economies. Once you are done building an Indian equity portfolio, consider allocating money to diversified indices overseas, but total international allocation should be kept around 5 -10 percent of the portfolio,” he says.

Apart from rising interest rates, investors must also take cognizance of geopolitical tensions. Volatility may not disappear overnight and may test your patience. It is better to allocate money to equities, be it domestic or international, with a minimum timeframe of five years.

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