With dollar gaining strength against weak rupee, which MFs should you buy?The Indian rupee is plumbing new depths every day and making headlines. With one US dollar now fetching over 71 Indian rupees, the domestic currency has depreciated to the extent of over 11% year to date. Every weakness is an opportunity for investors if you are smart and nimble. A falling INR can be boon for those looking to invest in international equity mutual funds. However, do remember that predicting that the rupee will fall further from these levels is as easy or difficult as telling whether stock markets will rise tomorrow.

Why international funds gain due to a weak rupee

International equity MFs invest in assets that are offshore. With the depreciation in the domestic currency, the offshore assets tend to rise in value due to the increase in exchange value as a result of a high exchange rate. Let us simplify this even further. International equity MFs invest in foreign assets. Although their Net Asset Value (NAV) is declared in Indian rupees here, the value of their underlying assets is determined by the value of the relevant foreign currency, not the Indian rupee. Hence, a weak rupee will generally mean a rising NAV for international equity MFs.

For example, assume that an international fund focused on the US market has an NAV of $10 (in US dollar valuation) and the US dollar is trading at Rs 71 today. Hence, the NAV of that fund in rupee for today would be Rs 71 x 10 = Rs 710. If the US dollar trades at Rs 75 tomorrow, the NAV of that fund in Indian rupee will simply increase to Rs 750 even if its NAV in US dollars remains the same tomorrow.

At a time when some domestic large-cap funds have struggled to give even 15-20% returns in one-year time-frame, some of the international MFs have really given handsome gains. Motilal Oswal NASDAQ 100 Exchange Traded Fund has gained over 40% in 1 year. It’s not alone. Franklin India Feeder Franklin US Opportunities Fund is up 36%, DSP US Flexible Equity Fund is up 30%, ICICI Prudential US Bluechip Equity Fund is up 29%, Reliance US Equity Opportunities Fund is up 29%, Aditya Birla Sun Life International Equity Fund is up 28% and DSP World Energy Fund is up 27% in last 12 months.

Options galore for investors

There are more than three dozen international mutual fund schemes. You can group them into different buckets based on their investments: funds investing in commodity stocks, real estate linked stocks, diversified international equities, European shares, global energy company stocks, gold company shares, US company stocks, shares of firms engaged in emerging markets, and global exchange-traded funds (ETFs).

Do remember that a weak rupee and the strong dollar is not the only reason you invest. The major factor driving international equity MF performance is the underlying performance of the assets that the scheme holds.

But it is true that typically when the Indian rupee depreciates, these global oriented funds do very well.

Which factors investors should consider

International equity MFs are all specialised products meant for smart investors. The retail investor who follows a portfolio asset allocation approach can also take the help of these funds. Allocate 5-10% of your equity MF portfolio to such funds. These can provide good diversification as well. However, do remember a few points.

* Don’t chase performance, don’t chase returns. Look at your investment objective and see if you have the ability to handle the volatility of global products. Such products are much more volatile than a domestic-oriented diversified equity fund. In the bad years, international equity funds have fallen by 30-50%. But, when they do well, they have gained 80-100% in a year as well.

* Investors should not look to time the markets but invest on a regular basis and in a systematic manner in international MFs. Typically, the exposure should depend on the individual’s risk profile and investment objective. Do not go overboard even if you are absolutely sure the rupee will depreciate further and may hit 75 versus dollar!

* All types of equity investments warrant a longer investment horizon. Hence, it is highly recommended that investors come in with a three-to-five year horizon or more. It is very difficult to time the market and also accurately predict rupee-dollar movement. A systematic investment plan (SIP) approach is best.

Staff Writer

This article is written by RupeeIQ editorial staff.