Plan to send your child to US for studies? Invest in feeder funds now

US-based feeder funds from India invest into their parent company's fund, which is domiciled in the US. Investors can invest in rupees, which is then converted into dollars. The dollars are re-converted into rupees during redemption, says Ashley Coutinho.

Image used for representational purpose only. Photograph: Brendan McDermid/Reuters.

The surge in US equities and the sharp depreciation in the Indian rupee against the dollar post Donald Trump's victory in the US elections have boosted the returns of Indian feeder funds that invest in the US market.

The funds have given an average category returns of seven per cent in one year, data from Value Research shows.

JP Morgan US Value Equity Offshore Fund is the best performing fund with returns of 11.2 per cent, while Franklin India Feeder Franklin US Opportunities Fund has returned -1.8 per cent. Sensex, in the past year, has returned 0.7 per cent.

Last week, the four most widely tracked US indices -- the S&P 500, the Dow Jones Industrial Average, the Nasdaq Composite and the Russell 2000 -- hit all-time highs simultaneously, a feat that has been achieved only once before.

The benchmark Dow Jones Industrial Average has returned 9.9 per cent in the last one year and surged 4.4 per cent post November 8. The Indian rupee has depreciated 3.24 per cent against the greenback to 68.78/$ since November 8.

The US-based feeder funds from India invest into their parent company's fund, which is domiciled in the US. Investors can invest in rupees, which is then converted into dollars. The dollars are re-converted into rupees during redemption.

Feeder fund investors need to assess two key parameters before investing. The first is the prospect of the country, region or theme the fund will invest in, and whether the fund will offer enough diversification. Historically, Indian and US markets have had a low correlation, offering diversification to Indian investors.

The second is the stability of the currency one invests in. However, diversification into different geographies -- and not currency play -- should be the chief reason for investing into these funds.

Currency play, if at all, should be used with a specific goal in mind, say experts. For example, if you plan to send your child to the US five years from now and expect the rupee to depreciate five per cent every year, adding US funds to your portfolio might be a good idea.

"Diversification should not be for the sake of diversification," said Hemant Rustagi, CEO, Wise Invest Advisors. For example, he says, there is no point investing just Rs 25,000 in international funds, if your portfolio is Rs 10 lakh. "A low contribution will neither boost returns nor act as protection. These funds should form at least 5-10 per cent of your portfolio," he says.

Despite the recent rally, Trump's policies may dictate the future course of US equities. "It is difficult to say how the US equities will perform going forward and a lot depends on how Trump's policies will play out. As of today, I would prefer the Indian markets over the US equities considering the significant correction in the former," said Rustagi.

According to Manoj Nagpal, CEO of Outlook Asia Capital, Indian investors can expect to make annualised returns of around 8-9 per cent in the next 2-3 years provided the rupee depreciates another 4-5 per cent.

"This is assuming a GDP growth rate of 2-2.5 per cent, an inflation of 0.5 per cent and a 1 per cent EPS growth. This is a best case scenario and it is entirely possible that returns may be close to zero," he says.

A recent note by Morgan Stanley says that Trump may deliver a fiscal boost but there is uncertainty surrounding his trade policies. "On net, this development provides a lift to our growth forecasts, and enables a pickup in the pace of monetary policy normalisation. We have lifted our growth forecast for 2017 to 1.9 per cent 4Q (2 per cent for full year)," said the note.