The current market situation in India has forced mutual funds to come up with products and strategies to combat the domestic economic slowdown. One such idea which has worked very well for the investors is investing in US equities via something called feeder funds.
What are US Equity feeder funds? Why should it be of interest to the investor?
Feeder funds collect money from India and invest in markets like the US. This provides investors with an opportunity to invest in stocks across some of the worlds larges geographies like the US. It makes sense to allocate some of your portfolio in a US fund for the next 1-2 years for the following reasons
(1) As witnessed recently the Rupee slid considerably against the USD on the possibility of tapering of Federal Reserve bond purchase program wherein. Although the Federal Reserve has delayed the program, however it is common knowledge that this liquidity boost will come to an end very soon.
(2) It is a distinct possibility that sooner or later the current market rally may not continue in the medium term as it is primarily FII driven and they would pull out a considerable portion of the money allocated to India
(3) The US markets are showing steady recovery with more indicators turning positive than negative, or where at least the rate of decline has been lower.
(4) The US comprises over 30% of global market capitalization, and has companies like Apple, Coca Cola, and Google amongst others which have given blockbuster performance in recent times.
(5) Indian investors can gain exposure to several themes that are just not available within the country, such as defense, aerospace, semiconductor, toys and e-commerce services.
Thus investors can look into benefiting from scenario where they can gain from companies performing well along with a possible depreciation of the Rupee against the USD.
Limitations
(1) These funds are susceptible to currency market fluctuations. Hence the gains would be limited if the Rupee appreciates against the USD.
(2) Actively managed funds have a higher expense ratio than passive funds or ETFs as they have to pay twice, once to the Indian arm and again the actual foreign fund
(3) International funds are treated like debt funds for tax purpose and hence subject to capital gains tax laws.
How much should you allocate?
Given the scenario explained above and if yo are a person who is not averse to playing the high risk high return game, then we could look at investing between 15-25% of equity portfolio. However please note that this you should be ready to book profits aggressively and should exit this portfolio in a span of 1-3 yrs towards India equities.