After the BSE Sensex’s 45 per cent gain in the last one year, domestic equities are no longer cheap. The Sensex’s trailing price-earnings ratio (20.5 times) is above its five-year average (17). Given that the PE is up from 16.3 to 20.5 times in one year, markets have been driven more by hopes of pick-up in growth, than by an actual earnings improvements.

Though India’s prospects do look quite good for the long term, equities are not risk-free. Any disappointment on corporate profits or sudden withdrawal of liquidity by foreign investors can trigger a correction. For investors who would like to insure against such risks, diversifying into US markets is a good option.

Why diversify into US markets and not elsewhere? For one, it is the only major global economy today apart from India’s, which seems to be firmly on the path to recovery. In its latest World Economic Outlook, the IMF sharply upgraded its 2015 GDP growth projection for the US by 0.8 per cent (to 3.1 per cent). Two, recent geo-political turmoil has re-established the dollar as the ultimate safe haven. Three, for an Indian investor, the US market also offers exposure to high potential sectors (such as e-commerce or biotech, for instance) that are not represented in the domestic listed space.

The Dow Jones Industrial Average trades at a forward PE of 15.8, lower than the Sensex’ 18.6. Of course, the US market carries its share of risks. Dollar strength can impact the earnings of US-based multinationals and a rate hike can be negative for equities. However, Indian investors may buy into US stocks (and the dollar) to diversify against domestic currency as well as market risks.

Attractive option

Among the options available to investors looking for a US exposure, the Franklin India Feeder – US Opportunities Fund is an attractive one.

This is an India-based fund that redirects investor money into the Franklin US Opportunities Fund, an established fund that cherry-picks growth stocks from across the market cap range in the US market. In dollar terms, the US fund has delivered an 18 per cent and 15 per cent annualised return over three and five years, respectively (as of December 2014). Returns in rupees would have been higher.

The top exposures of this fund as of December 2014 were in sectors offering fairly secular prospects such as technology (26.8 per cent), biotech/pharma (25.8 per cent) and consumer (18.3 per cent), making it a good fit for an Indian investor’s portfolio. Top stock holdings were Celgene Corp, Actavis, Mastercard, Google, SBA Communications and Facebook.

Two caveats here. Investors should look at the fund only as a diversifier and park up to 10 per cent of their portfolio in it.

Global funds don’t enjoy the same tax breaks as domestic equity funds. Capital gains will be taxed at your slab rate if held for less than three years and at 20 per cent with indexation, if units are held longer.

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