With domestic stock price rally making stock valuations very pricey, investors are beginning to look for avenues to diversify risk. Radhika Gupta, MD & CEO, Edelweiss AMC, outlines the case for allocating some funds into international funds in this interview with BusinessLine .

What are the compelling arguments due to which investors ought to consider investing in international funds?

There are three arguments for investors to look at international funds. The single most important view is diversification. Different countries tend to perform at different points in time. Just as you diversify across fixed income, equity and gold, you can diversify across countries; you cannot take the single country risk. The second argument is access. This means there are many themes and ideas that you may be consuming as an Indian, but their stocks may not be listed in India. For instance, you use Netflix, but it is not listed in India, you use Paytm for payments, but you cannot invest in its stock. It’s the same story with credit and debit card companies.

The third and smaller reason is currency. The rupee depreciates at 4 per cent every year. So investment in foreign currency asset provides a hedge.

Talking about diversification, aren’t all markets in the same boat now with liquidity keeping them afloat. Any talk of inflation and monetary tightening sends the market crashing everywhere...

There is a danger in looking at international investing against the current background. You cannot invest in international funds with a horizon of less than 5 to 7 years, and the rule is similar to the holding in domestic equity. If you do tactical allocation in international funds, you will invariably go wrong.

Around 10 per cent of your equity portfolio can be allocated to international funds, and this can be gradually increased to 20 or 30 per cent, depending on the risk appetite. I personally hold some developed market funds and some emerging market funds in my international fund allocation.

Can you share some numbers on Edelweiss US Technology equity fund of fund’s performance? It has done quite well in recent past…

The US Tech Fund is just completing a year. We launched this a year ago when NFOs were just not happening due to the lockdown. But the theme of this fund – disruptive technology -- was accelerated by Covid-19. Be it automatic cars, cloud computing, streaming, digital payments, all these stocks were in demand. The JP Morgan fund holds a basket of companies with disruptive technologies, not necessarily in mature businesses like technology or hardware and not in nascent technology either. The fund investors have had a great experience; it was the first of the fund of its kind to be launched in India and investor returns over the last one year is 82 per cent.

The valuation of tech companies, especially the internet and social media companies, has become quite pricey. Is that a concern?

Obviously the US tech has had a golden run over the last decade. Believe me, despite how well the fund has done, we are cautious about how we market the fund. We keep reminding people that the technology theme is not a one-year theme. It is a structural theme and it’s not a sectoral fund. It’s a theme that transcends sectors. While we buy the argument that the stocks are pricey, their contribution to the S&P 500 index is significant. But they need to be a part of your asset allocation to equities and not comprise the entire portfolio.

Do you see a sustained rally in emerging markets? Is Edelweiss emerging markets opportunities equity offshore fund a good idea now?

Absolutely. The last decade was the decade for developed markets, but the coming decade can see emerging markets doing well with vaccine rollout, weak dollar etc. We have been talking to investors about two opportunities in this space: the Emerging Market Opportunities Offshore Fund which has China, India, Russia and various other emerging market. The other is the dedicated Edelweiss Greater China Fund. Since you already own Indian stocks, if you wish to own the other promising emerging market stocks, this fund is an avenue.

Would you like to speak about the Nifty PSU bonds and SDL index fund…

This product will have 50 per cent in AAA PSU bonds and 50 per cent in SDL products. It comes with the same structure as the Bharat Bond fund, where the investor has to hold the bonds till maturity. Here the maturity is 2026 with an index return of 6.3 odd per cent. We are looking at SDLs now because these bonds typically trade at yields lower than AAA PSU bonds and higher than G-Secs, but right now they are giving yields higher than AAA PSU bonds because of the large amount of State borrowing. So investors get an excellent yield for papers with a sovereign guarantee.

Don’t you worry about credit risk in SDL bonds given the elevated borrowing and delicate fiscal condition of some States?

Borrowings are elevated, but these are sovereign paper being issued by the RBI, so the risk is limited. Also, though this is an index fund, it is liquidity weighted. So we have allocated more funds to bonds that are liquid and of better quality. And this is a 50:50 fund. It’s not completely SDLs or PSU bonds.

Given the volatility in bond yields, there is a risk of capital loss if investors exit before maturity, right?

This is not a product for short-term investors; you need to hold for at least three years. Our analysis showed that even if there were a 100 bps increase in yields in 3 years, rather than 6.3 per cent, your yield would be 6.1 per cent, which is still higher than the 1-year bond yield. If you are looking at a 1-2 year horizon, there will be mark-to-market losses.

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