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International Funds Fare Badly

The category lagged all others by a wide margin during last year

International funds have failed to match the outstanding performance of their domestic counterparts in 2014. The category trailed all other categories of mutual funds except for gold funds by a wide margin and managed to offer only 2.56 per cent average returns to investors in the past year. During the same period, diversified equity funds offered an average return of over 30 per cent and mid- and small- cap funds gave an average return of 74 per cent. Ten mid- and small-cap funds posted returns above 85 per cent, with micro-cap funds leading the pack. Even debt funds with a longer-term maturity like gilt and income funds have generated an average return of 16 and 13 per cent on hopes of a rate cut amid moderating inflationary pressures.

Most domestic equity mutual fund schemes have posted a phenomenal performance in 2014 as the market touched an all time high. There was a turnaround in the economy after the general elections. Macroeconomic variables turned favourable with oil prices falling, reduced inflation rates, markets breaking new records every day and overall improved sentiment in the economy.

Amidst all this euphoria, international funds cut a sorry figure. Among them, thematic funds were the worst hit, with some funds posting negative returns during the previous year. For example, DSP Blackrock Mining Fund offered the lowest return of -22.38 per cent and HSBC Brazil around -19.73% the last year. Funds with gold, commodities, energy in the international fund category as underlying themes have also fared poorly. These funds did not deliver even in 2013.

The concept behind international funds seems to be great as through them investors get to invest in overseas markets, which otherwise is tricky and full of hassles for the average investor, given the many unknowns involved. However, funds with an underlying theme are always considered risky, as a particular theme may do well or fare badly during a specified period. It is always better to choose a diversified fund instead of a thematic fund.