The falling rupee has dominated the news of late. DNA Money described it as the ‘summer of 69’ referring to the number of rupees that one dollar now fetches. The rupee crash has come with rising interest rates (as foreign investors withdraw money), causing borrowing costs for companies to rise and both equity and debt mutual fund investors to suffer. However, there are a few categories of funds that have actually gained from this trend
IT funds have been on a roll for over a year now. The category has an average one year return of 39.6%. The five-year return is equally impressive at 20.3%.
The category is led by the Tata Digital India fund with a whopping 48.6% return. It is followed by Aditya Birla Sun Life Digital India fund, SBI Technology Opportunities and ICICI Prudential Technology Fund all at a roughly 39% return over the past year. Franklin India Technology Fund brings up the rear with a (nonetheless impressive) 31% return. IT funds invest predominantly in Information Technology companies such as TCS, Infosys, HCL Tech and Wipro. Some also invest in allied sectors like telecom.
We spoke to Mahesh Patil, fund manager of Aditya Birla Digital India Fund, recently. He pointed to “attractive valuations vis-à-vis broader market, weakening INR vs. global currencies and improvement in demand outlook” as key reasons for the strong IT sector performance. To put it simply, IT companies earn in dollars and hence record higher earnings when the rupee falls against the dollar. This makes the IT sector, a power hedge against rupee weakness.
Several Indian mutual funds invest in US stocks. Prominent among them are the Motilal Oswal MoST NASDAQ ETF, Franklin India Feeder Franklin US Opportunities Fund, DSP Blackrock US Flexible Equity Fund and ICICI Prudential US Bluechip Fund. These funds have delivered 31.1%, 29.1%, 19.8% and 18% respectively. Their three-year returns range from 12-19% and five-year returns from 13-22%. In other words, investing in US stocks through Indian mutual funds has been an immensely rewarding proposition. It is important to understand that these returns are particular to US-centric international funds. Those investing in Europe for example, have not done equally well.
Note the taxation
IT sector funds are taxed as equity funds and international funds investing in the US are taxed as debt funds. The former enjoy a short-term capital gains tax of 15% for holding periods of up to 1 year and a long-term capital gains tax of 10% for longer periods. Investors also get an exemption on gains up to Rs 1 lakh per annum and their gains made before 31st January 2018 have been exempted.
The US focused international funds are taxed as per the slab rate (which could be 30%) for holding periods of up to 3 years and at 20% with indexation for longer periods. Indexation reduces the tax burden to account for inflation.
Which one is better? Equity funds, broadly speaking, have the advantage in short-term capital gains taxation. The situation is now more balanced between the two for long term capital gains taxation.