Should you invest in Index and International Funds?
Over the last couple of years, we all have been hearing a lot about passively managed Index Funds and International Funds. There has been constant deliberation among investors and advisors on the role these two funds can play in the overall portfolio. For years most of the investors have looked at actively managed funds focusing on Indian equities to create wealth for them. Now, is there a need to change the strategy.
Index Funds has gained attention of investors as it offers investment based on market capitalization. The strategy is not to actively manage the investment and mimic the Index created by NSE or BSE based on market capitalization. If today, the weight of HDFC Bank in NIFTY 50 is 10% then the fund will also have 10% of the portfolio invested in HDFC Bank. The fund will rebalance as and when there are changes in the indices. Even from cost perspective, the expense ratio for Index Funds is low as there is no active fund management. Few of the common Index Funds NIFTY 50 Index Funds, SENSEX Index Funds & NIFTY Next 50 Index Funds.
Our view on Index Funds
Index Funds have potential to generate good returns for you, however the consistency of Index Funds outperforming active funds over a long term depends on the maturity of the economy and depth in the stock market. In developing market like India, there are opportunities for businesses to improve their efficiency and do well across different companies and sectors as well. Hence having a blend of both active and index funds in your portfolio can work better for you. The allocation in Index fund can be high for first-time or low-risk profile investors. Investors with moderate or high-risk profile can have around 15 – 20% allocation in Index Funds.
International Funds help you invest in companies outside of India and diversify your investment across different countries. These funds predominantly invest in basket of equity funds based on different themes or countries. At present, international funds preferred by investors are those investing in USA, China and Globally Diversified companies. You can invest in companies like Alphabet (Google), Apple, Microsoft, Amazon, Facebook, Samsung, Tenent, Alibaba, etc. through International Funds.
Our view on International Funds
International Fund gives an opportunity to diversify and invest in companies which usually we cannot invest directly. Investor with moderate to high-risk profile investors or those who have built reasonable allocation in India based equities can look at diversifying their portfolio in International Funds. You can consider allocation of around 10 to 15% of your portfolio in International Funds if you wish to invest in international companies. Investors who have just started their investment in equities or who have low risk appetite may avoid it at this stage.
While both Index Funds and International Funds have done well for investors in past and do have the merits to be a part of your portfolio; you should add them gradually in your portfolio and continue to diversify across different market capitalization and sectors to reduce the overall risk and generate return.