Why you should not buy international funds

Why you should not buy international funds

With Indian equity underperforming over the last few years and with the opposite happening in the US - international funds and stocks are all the rage. Today, thousands of investors are moving towards buying stock and funds having international exposure. However - it remains necessary for investors the keep things in mind before taking the plunge. What are they? 

High returns

There’s a saying, “Hindsight bias is a cardinal sin.” Hindsight bias means making decisions based on events in the recent past. The same goes for investing in international markets - specifically the US markets where performance has been nothing short of phenomenal over the last decade. Investors expecting similar performance will most likely be disappointed at some point.

The future most likely is going to be less fortunate, and investors should account for it in their expectations. 

Betting on currency depreciation

A lot of investors wish to invest in international markets to protect themselves from rampant currency depreciation over the last two decades.

The Indian rupee has depreciated close to close to 5% every year on average over the previous decade. However - it’s essential to realize that the currency movement is very volatile year over year, and there are some years where the rupee has appreciated (2017).

Philosophically - it’s essential not to have a view on the currency. The whole concept of asset allocation and diversification means not having opinions on things and spreading your bets as it is difficult to time markets. 

Betting on themes/sectors

Sectors and themes are usually discouraged in domestic markets - unless investors take directional bets or market timing bets. Sector funds tend to riskier, more volatile and lack diversification benefits of sector diversified mutual funds. 

Betting on the US Only

The US market is one of the few markets that have delivered over the last decade. Also - a lot of companies listed in the US markets are effectively global businesses.

However - investors looking at geographical diversification should also consider other markets. Emerging markets such as China, Taiwan, Brazil, and developed markets as Japan and Europe offer excellent opportunities.

As mentioned - past performance should be an indicator of future investment decisions. 

Fear of short term failure

One of the main reasons investors tend to make below-market returns is that investors tend to shy away from investing when they are doing poorly. Investors hate buying cheap (due to fear of things becoming cheaper) and love buying expensive (due to greed of it becoming more expensive). Fear of short-term failure should not deter investors if they have a 3-5 year vision. 

Buying stocks

Investors looking to purchase shares do it for two reasons. One is where they want to buy businesses and hold on to them for long periods (3-5 years minimum). The other purpose is to buy for $10 and selling it for $20. Investors in the latter category are speculators, and history shows speculators rarely make money.

As Paul Samuelson said, “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

Small allocations

Diversification benefits occur when investors allocate a substantial portion of international equity. Experts recommend a minimum of 10-15% of the overall equity portfolio towards foreign funds. Having 3-4% allocation has no diversification benefits and limits their funds to ‘just another mutual fund in the portfolio.’ 

In conclusion, reasons to buy International equity or funds should be different from those discussed above. Diversifying the Indian equity portfolio, buying dollar as a currency and asset allocation should be the ones on top of the list.