Should You Diversify Your Portfolio With US-focused Funds?

Are you looking to diversify your portfolio beyond Indian shores? Do you want to get returns from a well-performing economy? You may consider investing in US-focused funds. It is an international fund that invests predominantly in stocks of American companies. You could benefit from the upswing in the US economy across different market cycles. However, should you diversify your portfolio with US-specific funds? 

What are US-focused funds?

The US-focused funds invest the bulk of the corpus in stocks of US Companies. It may construct a portfolio of US stocks to match the components of an index such as the Nasdaq 100 and the S&P 500. You may consider the US-focused fund of fund scheme, that invests most of the assets in a US-specific mutual fund. However, it may have a higher expense ratio as compared to many equity schemes. 

Should you diversify your portfolio with US-focused funds?

Invest in a strong economy: You may consider investing in the world’s largest economy by net wealth and nominal GDP. The size of the US economy in nominal terms was a massive $20.58 trillion in 2018 and could reach $24.9 trillion by the year 2023. 

You could take a look at the performance of the Nasdaq 100 index, which is a basket of the hundred largest and actively traded US companies by market capitalisation. The Nasdaq 100 touched a new low of 6,994 points on March 20, 2020. However, It has since made a terrific recovery to over 12,200 points as of November 27, 2020.

Invest in global leaders: You may have an opportunity to invest in high-quality companies that enjoy success across the globe. You may consider diversifying your portfolio with US-focused funds to get exposure to segments such as semiconductors, technology, or electronics. You may have limited avenues to invest in these segments in India. 

Also Read: Should You Invest In Pharma Funds?

Currency Factor: You may consider the US dollar as a safe-haven currency during global turmoil. The rupee has lost value as compared to the US dollar over some time. You have the opportunity of earning a higher return by investing in a stronger US currency. You may find US-focused funds offering better returns if the rupee depreciates against the dollar over a period of time. 

Low correlation with the Indian economy: You could diversify your portfolio with an asset that has a low correlation with your existing investments. For example, the US equities have a low correlation with the Indian stock markets. Indian indices such as the BSE Sensex and Nifty 50 would react to events in the USA. However, the two markets may not move in tandem with each other.

You could diversify your portfolio with US-focused funds. It may offer a higher return as compared to Indian equity funds, during periods when the Indian stock market fails to match expectations. 

How much should you invest in US-focused funds?

You may consider your overall asset allocation before putting money in US-specific schemes. You could have around 10%-15% of your equity assets in US-focused funds. Invest in these funds through the systematic investment plan or the SIP. It helps you to stagger your investments in the US-specific schemes over some time. 

You could consider investing in US-focused funds if you expect to incur expenses in dollars at a future time. For example, you may invest in these funds if you want to send your children to the US for higher education. It protects your portfolio if the rupee loses value against the dollar over some time. 

You may invest in US-focused funds with a time horizon of five or more years. You get a chance to invest in stocks of global leaders and build a strong portfolio. Select US-specific funds only if you have the risk appetite to invest in stocks of US companies. In a nutshell, US-focused funds may help you to meet your investment goals and also diversify your portfolio across geographies.

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in

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