Mutual Funds

Fund Query: What are the global equity MFs with highest return potential over 8-10 years?

Hari Viswanath BL Research Bureau | Updated on October 02, 2021

I am a 50-year-old salaried professional. I am regularly investing in mutual funds through SIP for retirement, which is about 10 years away.

I would like to add international equities exposure to my portfolio. I currently have SIP with Parag Parikh FlexiCap Fund which has some overseas exposure. I would prefer one with the highest potential for return over 8-10 years.

As far as US equities are concerned, which is the better index to invest in: S&P500, Nasdaq 100 or Russell 3000?

With respect to Mirae Asset S&P 500 Top 50 FoF, is S&P 500 Top 50 ETF worth considering for eight years?

Shailesh Singh

In equity investing, the longer the time horizon, the lower the risk of underperformance vs peers/benchmarks or the risk of loss of capital. In your case, while your time horizon of 8-10 years is not too short, you must take the plunge into international funds only if you have a high risk appetite since you are close to retirement. Markets globally are at a peak and there are many headwinds on the path for global markets to deal with over the next few months, like the tapering of bond purchases by central banks and earlier than expected upturn in interest rate cycle in the US if inflation is persistent. The likelihood of a structural slowdown in Chinese economy and its impact on global economy is also a risk. Hence, if you begin now, you must be prepared for a correction and capital loss, before markets can recoup and deliver returns commensurate with the risk. If you want to play it a bit more safe, you can wait for a 15-20 per cent correction from current levels before you start your SIP. If the correction is more severe, then you could also consider a lump sum investment. Even then, keep in mind that international funds should not constitute more than 10 per cent of your total portfolio.

Investing in US equities/Funds/FoFs comes with three main advantages — one, exposure to unique growth themes that you may not get in domestic investing; two, geographic diversification — exposure to opportunities in US economy and economies across the world as many of the large-cap US companies are global in nature with significant per cent of revenue split between the US and rest of the world; and three, currency diversification which could add to your returns if the rupee depreciates. For example the Indian rupee has depreciated at a CAGR of two per cent against the USD in the last 5 years, and 4 per cent in the last 10 years.

Considering the above and given diversification must serve its full purpose of optimal returns, the Nasdaq 100 index would be best to invest in. Compared to the other indices, Nasdaq 100 has higher weightage to information technology and to unique growth themes. Another reason is that for investors from India who are anyway well-exposed to financials — as benchmark indices here have a heavy weightage to that sector — Nasdaq 100 offers better diversification with no financials in the index.

In terms of returns also, in the last 5 years, the Nasdaq 100 has significantly outperformed other indices and given a little over 216 per cent returns (TRI, USD returns) versus the S&P 500, which has given 118 per cent returns. The S&P 500 Top 50 has closely tracked the S&P 500 and its returns are modestly better ar 134 per cent. The Russel 3000 seeks to be a benchmark of the entire US stock markets and hence includes more mid and small-cap companies. It has also returned only around 117 per cent over the last 5 years. Nifty returns (TRI, INR returns) during the same period is at 110 per cent. The outperformance of Nasdaq 100 highlights the need to go for growth stocks/sectors when you diversify into developed market stocks.

Although past performance is not a indicator of future returns, disruptive technologies (electric/driverless cars, SaaS, Artificial Intelligence) are taking over the world and Nasdaq 100 gives higher exposure to companies pioneering/riding these themes and underlying technologies (software/semiconductors) that enable it. With US remaining the cradle of tech innovation, any company pioneering a new mega technology/innovation that gets commercialised is likely to end up in the Nasdaq 100.

You can consider Motilal Oswal Nasdaq 100 fund of fund, launched in end-2018.

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Published on October 02, 2021

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