Allocations to international equities funds help balance investor portfolios in keeping with the typical consumption patterns

Though the news on economic front is grim, Indian equities have done reasonably in the last 4 – 5 months. What is your outlook on Indian equities in the medium term (2 – 3 years)?

Actually we see the news flow quite positively. The headline GDP number was a shock but this was amidst the backdrop of a strict lockdown. That’s all in the past. We remain more optimistic about a gradual recovery in growth as we see gradual normalisation in economic activity. Encouraging high frequency indicators, a resilient rural economy, helped by a buoyant monsoon season and government spending and an accommodative monetary policy environment are key reasons for our positivity.

The pandemic saw a companies take swift action to cut costs as revenues slowed during COVID-19 to protect margins and profits. As the situation has begun normalizing we now see earnings recoveries. Additional capital was used to mitigate tail risk to the business or increase capital for growth. In short, corporate India has used the pandemic as an opportunity to improve the outlook by remaining nimble and cost conscious. This is likely to bring rewards once economic activity recovers.

We remain constructive on Indian equities from a 3 year view and our portfolios today play a cautious yet optimistic investment strategy. Any volatility in markets should be used to top up existing investments. For existing investors especially those that have resisted the drop and have endured volatility, the learning is simple, volatility is best served by staying invested rather than trying to time markets.

In the past 5years global markets / MSCI World Index have outperformed India / Nifty 50 (USD) by a fairly significant margin. Should India investors get exposure to global equities to diversify risks and improve risk adjusted returns? Please share your views?

The crux of the global investing decision especially in the Indian landscape is to diversify away home bias risk as well as participate in themes that affect us in India but are not available to invest in the domestic equity markets. Indian equity markets account for only 3% of the global equity markets by way of market capitalization. Allocations to international equities funds help balance investor portfolios in keeping with the typical consumption patterns.

The risk reward also favours international diversification. An evaluation of the last 10 years highlights how international exposure of 20-30% of the portfolio compliments a domestic portfolio by meaningfully reducing volatility while improving the return profile. The disclaimer here that past performance may or may not be sustained in the future.

Though there are a few mutual fund schemes which invest in overseas equities, there is very little awareness of these products among retail investors. For the benefit of average retail investors please explain how global investing is different from domestic equity investments. What are the main pros and cons?

When we as individuals are making a purchase, be it for a discretionary or a non-discretionary product, we want the best available product in the market. The choice we make is irrespective of whether the product is a domestic product or an international one. The biggest advantage of global investing is that the investor gets to participate in the growth journey of some of the best available brands / franchises from around the world. For e.g. Amazon is today an integral part of one’s shopping experience. While India still remains a land of abundant opportunities, there are so many new age businesses which are unfortunately not listed on the Indian bourses. Investing in a global fund will not only help the investor participate to such niche opportunities but also diversify the geographical risk.

With regards to Axis Global Equity Alpha Fund of Fund please describe the salient features of this fund?

Given the current context, an allocation towards a global fund holds prominence. Some of the salient features of the fund are as below:

1. Exposure to niche opportunities: By investing in this fund, an investor can gain exposure to global themes which are currently unavailable in India.


2. Risk diversification: While the risk of investing in equity is an inherent part of the asset class, the level of risk is different from one country to the other. While developing economies are associated with a higher degree of risk, developed economies come with a lower threshold. Also as the correlation among different countries is low, investing in a geographically spread portfolio reduces overall portfolio risk.


3. Better risk adjusted return: Equity market returns are a combination of macro as well as micro factors. While the micro factors can be controlled via various policy measures, the macro factors depend on how things move globally. This will lead to gyrations in returns across economies around the world thereby making it difficult to predict the next outperforming market. A geographical diversification can not only help in achieving lower levels of risk but also deliver risk adjusted returns.

International investment should be what % of an investor’s portfolio?

Since international investing has not been widely tracked and Indian investors are only just beginning to understand the rewards of equity investing, we believe investors should look to allocate 5-10% of their portfolios initially to get a flavour for international stocks. This approach ties in well with a mutual fund allocation since investors can even consider systematic investment options like SIP & STP. Over the long term we believe a 30% allocation of the overall equity pool is ideal. Investors however must consult financial advisors to determine individual allocations depending on their risk profile.

What is your advice for investors who want to invest? Who should invest? What should be the minimum investment horizon? How should investors approach this fund?

Like I mentioned Global Equity Alpha FoF is a stepping stone for existing investors looking to diversify their equity allocations. We believe that this is an ideal solution for any existing equity investor with wealth creation on their agenda. Like other equity products, this too is ideal for investors coming in with a 3-5 year view.

For Benchmark disclaimer and more details, refer

https://www.axismf.com/mutual-funds/equity-funds/axis-global-equity-alpha-fund-of-fund/ga-gp/regular

Mutual fund investments are subject to market risks, read all scheme-related documents carefully.