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Do you believe that passive funds can be effectively used for asset allocation

1.Do you believe that passive funds can be effectively used for asset allocation

Most of you would have your own unique way of approaching things. While some of you might be aggressive and open to new adventures and experiences, others might prefer to walk down the well-known path and stick to the things that you know best. Similarly, in investing too, there are different styles. The two most common ones are passive investing and active investing. In India, active investing is well-known as its main purpose is to generate returns that are higher than the benchmark. However, equally important is passive investing as it plays an important part in your overall portfolio allocations.

The basics you need to know about passive funds: The most important thing that you need to know about passive funds is that they basically track a market index and try to generate returns that are in line with the index. The strategy they follow is more of a buy and hold strategy where the fund manager simply buys the same securities as in the market index and in the same proportion. The objective of passive funds is to meet the returns of the market. Some key characteristics of passive funds include:

  • Passive funds have very low investment management fees as they are just following the index and don’t have too much turnover. Passive funds are limited to investing in the same manner as the index. So, they are inflexible and cannot generate returns higher than the index.
  • The returns that these funds generate are slightly lower than the benchmark that they track. The slightly lower returns are due to the fees paid and any mismatch that might be there in rebalancing the portfolio.

Use passive funds to create a well-rounded portfolio

Asset allocation can help you create a well-diversified portfolio across multiple investments. By spreading your portfolio investments across different investment types, you can ensure that sharp negative movements in any one investment do not have a large impact on the overall health of your portfolio. Now, active funds and passive funds serve two very different purposes. While active funds try to generate above-market returns, passive funds try to generate returns that are in line with the market. Inevitably, active funds are riskier than passive funds.

When it comes to effective asset allocation, both active funds and passive funds can find a place in your portfolio. Active funds can be used to potentially grow your funds while passive funds can be used to generate equity like returns but with lower risk.

2. Is it the right time to invest in international funds If yes which are the best

Today, for an important Zoom meeting early in the morning, you may have ordered a coffee from Starbucks. While waiting for the coffee to arrive, you shaved with a Gillette Mach 5 and brushed with an Oral B electric toothbrush using Colgate toothpaste. Next, you check your iPhone 12 for messages on Whatsapp and Facebook, and quickly look at your investment portfolio. You are surprised to see that while all global markets are positive, the Nifty has witnessed a sharp drop because of which your portfolio is in the red.

After the meeting, you sit back and think of your day so far. You realise that while it is only 11 in the morning, you have already used multiple international brands that have made your day easy. At the same time, you realise that your investment portfolio has no international brands and wonder whether the presence of some international investments would have reduced the losses on your investment portfolio.

The short answer to that is, yes, you can make your portfolio stronger through international investments. And the good part is that you can do this without the hassle of choosing the right international investments for your portfolio and tracking them. You can simply invest in international mutual funds.

Know your international mutual fund

International funds are basically mutual fund schemes that invest in equities or fixed income securities of international markets. They give you an opportunity to participate in global themes, regions, or countries. For example, US technology stocks have been witnessing strong growth and are expected to continue moving in an upward direction. If you want to benefit from the growth in US technology stocks then you can simply invest in an international mutual fund that invests in US technology stocks.

Reasons for investing in international mutual funds

Diversification: Many of the factors that impact global equities are different from the factors that influence domestic equities. There are many foreign markets where the market returns are more stable than our domestic market returns. Thus, when you add such foreign investments in your portfolio you ensure that even if domestic markets are not doing well you can still gain from your investments in international funds.

Opportunity to participate in the potential growth of foreign companies: Inarguably, India is a market of opportunities and offers multiple avenues for wealth generation. However, international funds can let you invest in themes and opportunities that are currently not available in India but have the potential to witness substantial future growth. For example, a US technology fund could give you exposure to innovative US tech stocks that are expected to witness strong future growth. This kind of exposure would not be possible through a domestic fund.

Protect against a falling rupee: India is an emerging market and consequently its currency is weaker than leading global currencies like the US dollar or the Euro. If you have to make payments in foreign currency – like paying for your child’s foreign education, for example – then a falling rupee can have a big impact on your cash flows. Through international funds, a part of your portfolio can benefit from the strength of the foreign currency. As a result, the risk in foreign currency exposure gets reduced. Further, a fall in the rupee can also improve the returns that you generate in foreign currency terms as it increases the per unit value of the investment. Thus, international funds can potentially have two sources of returns – one, from the investment itself, and the other from the depreciation in the INR.

Investing in good international funds, especially those that focus on developed markets or strong themes, can be a good option. However, it is important to remember that international mutual funds can also be high-risk. Thus, you should consider investing in international mutual funds if you have a high-risk appetite and want to stay invested for the long-term. At the end of the day, investing in international funds is no different from investing in domestic equity or debt funds. You can do so directly with the AMC through an investment adviser, or through the many personal finance platforms available. You can even start a systematic investment plan (SIP) in an international mutual fund. So, instead of worrying about timing your investment, you need to see whether international mutual funds can add value to your portfolio and invest accordingly.

This answer should not be considered as ‘investment advice’. Kindly consult your financial/tax advisors to determine the financial implications with respect to investing in Mutual Funds. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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