Mutual funds. Four diversified funds that invest in overseas equities

Domestic and American markets have been divergent from January this year. Prominent US indices such as the S&P 500, Dow Jones Industrial Average and Nasdaq 100 have fallen 20-32 per cent year-to-date. In contrast, our own Nifty 50 and BSE 500 are down just 2-3 per cent over the same period.

The US, by most analyst expectations and the Federal Reserve’s assessments, is likely to head into a period of economic recession. As interest rate there rises, consumer sentiments and corporate earnings are likely to be hurt. India may not be fully insulated to global factors, but is the only bright spot among the larger economies, with likely GDP growth of over 6 per cent at least. Corporate earnings are also expected to be fairly robust for the foreseeable future and tax collections are at record highs.

Many retail investors, who took to investing in international funds or overseas ETFs or fund of funds, may be a tad confused now. From February 2022, as most of these mutual funds breached the $7-billion overseas limit set by the RBI, fresh inflows have been stopped by most houses. After the correction in the international markets, some fund houses have been opening schemes for inflows.

With mixed signals from the domestic and US markets, investors may be better off allocating mainly to domestic equities, with a pinch of US equities for added returns, especially in light of the stiff correction those indices and stocks have witnessed.

We take a look at four diversified funds that invest in a blend of Indian and overseas (mostly US) stocks.

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Investment strategies

Parag Parikh Flexicap, SBI Focused Equity, Axis Growth Opportunities and Kotak Pioneer are four fairly diversified funds that invest in a blend of Indian and US equities. Kotak Pioneer is classified as a thematic fund, but has investments across segments and not just technology players.

Among the four Parag Parikh Flexicap and SBI Focused Equity have a fairly long track record. Axis Growth Opportunities has been around for a little under four years, while Kotak Pioneer has existed for less than three years.

Overseas equities used to account for around 14-30 per cent of the overall portfolio till January 2022, just before the bar on inflows was imposed by SEBI. That ratio has reduced to 8-20 per cent in the latest August portfolio.

But all four funds follow different styles in their domestic as well as overseas investments.

SBI Focused Equity used to invest in three or four US stocks with significant exposures (4-5 per cent each), but now has only a couple of American stocks in its portfolio. Parag Parikh Flexicap invests in 6-8 stocks internationally. It has retained the same number of stocks, but has trimmed exposure to these. It holds 10 per cent of its portfolio in cash, perhaps waiting for opportunities to hike overseas exposures and also domestic opportunities.

Axis Growth Opportunities invests in over 20 overseas stocks and has retained those numbers, while reducing exposure to individual stocks. The exposure is quite diffused to individual US stocks, contrast to its domestic portfolio which is quite concentrated at the top.

Kotak Pioneer invests only in overseas funds for its international exposure, and not individual stocks.

Domestic portfolios

Except Parag Parikh Flexicap, the other three funds are fairly loaded on mid-cap stocks. These three funds invest 30-40 per cent of their portfolio in mid-cap stocks. But exposure is to high-quality names across sectors. This ratio has helped funds gain significantly from the broader market rally from March 2020. Parag Parikh is large-cap dominated and only 10 per cent of its portfolio is in mid-cap stocks.

SBI Focused Equity and Parag Parikh Flexicap also hold significant cash positions of 7 per cent and 10 per cent, respectively.

Axis Growth Opportunities and Kotak Pioneer do not have a very long record. Their performance needs to be watched before taking any investment decisions.

What must investors do?

In the current environment, funds that invest in a mix Indian and US equities would offer two benefits. One, asset allocation becomes an easier task as funds themselves would manoeuvre both markets for optimal returns. Two, it would help you maintain overseas investments indirectly even as inflows are shut for other ETFs and fund of funds.

Now, Parag Parikh Flexicap and SBI Focused Equity have a long track record of delivering excellent returns over the long term. When five-year rolling returns are taken from June 2013,  Parag Parikh Flexicap and SBI Focused Equity have delivered over 16.5 per cent returns and have beaten the BSE 500 TRI and Nifty 500 TRI by a good 4 percentage points over this period.

Their management of domestic portfolios has also been quite robust. Investors can consider these two funds for the core portion of their portfolio.

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