On February 03, 2022, Facebook’s parent company Meta Platforms witnessed the worst single-day crash in the US history as its share price plunged by 26.4%. Consequently, several International Mutual Funds in India as well as domestic mutual funds with exposure to global equities saw a decline in their daily NAV.
The sell-off in the stocks of the tech giant came on the back of poor quarterly earnings report due to growing competition. Meta revealed that their flagship product Facebook’s daily active users (DAUs) had dropped for the first time in its 18-year history.
Meta also said that Apple Inc’s Transparency Policy has hurt Facebook’s growth from advertisements, which forms a major source of the company’s revenue. According to the firm, the changes make it harder for brands to target and measure efficacy and success of their advertising campaigns on Facebook and Instagram; this will trip its revenue by USD 10 billion this year.
Graph: Meta Platform shares fall off a cliff
Data as on February 04, 2022
As you may know, International Funds have gained momentum in India in the last couple of years. Consistent outperformance of developed markets, particularly the United States, led by the new generation tech or FAANG (Facebook (now Meta), Apple, Amazon, Netflix and Google (Alphabet) stocks, has attracted many savvy Indian investors towards global equities. Mutual fund houses, as a result, are expanding their product basked with a plethora of overseas investment products.
Meta Platforms (Facebook) being a global tech giant forms part of the portfolio of many of these International mutual funds. Besides, some domestic equity funds have exposure to global equities, such as Meta Platforms, Amazon, Alphabet, and Microsoft.
Table: Mutual Funds with exposure to Meta (Facebook) witnessed a decline in NAV
|Scheme Name||Holding (%)||Impact on NAV (%)|
|Parag Parikh Flexi Cap Fund||5.99||-3.28%|
|Nippon India US Equity Opp Fund||5.31||0.51%|
|ICICI Pru NASDAQ 100 Index Fund||4.76||1.16%|
|ICICI Pru US Bluechip Equity Fund||2.87||0.18%|
|Aditya Birla SL Intl. Equity Fund-A||1.98||-1.92%|
|Motilal Oswal S&P 500 Index Fund||1.96||-2.69%|
|ICICI Pru Technology Fund||1.15||-1.00%|
|Axis Growth Opp Fund||1.15||-0.19%|
|ICICI Pru MNC Fund||0.98||-0.83%|
|Axis Special Situations Fund||0.53||-1.00%|
|Aditya Birla SL Intl. Equity Fund-B||0.50||-0.71%|
Holding (in %) as of December 31, 2021
NAV as on February 04, 2022
(Source: ACE MF)
Is this a cause of worry for mutual funds with exposure to global equities and its investors?
As we can see in the table above, most mutual funds (including Domestic and International Funds) that hold exposure to Meta (Facebook) have witnessed a decline in their one day NAV after a sharp fall in the firm’s share prices. Given the headwinds at play, Meta shares may continue to struggle in the near term.
What is important to note, Meta has a mammoth 3.6 billion monthly active user base, and right now a large part of its resources are being directed toward its next chapter of growth through ‘Metaverse’ technology. So, if the company’s long term fundamentals are strong, any short-term blip in its share price should not be a cause of concern for mutual fund investors.
Moreover, because mutual funds invest in at least 25-30 instruments, it not only aids in optimal diversification, but also potentially curbs the downside risk. Notably, stocks of other Big Tech companies, such as Google, Apple, and Amazon, inched higher in the last week as the firms reported strong earnings and are expected to do well in the coming quarters as well. These stocks along with other securities in the portfolio can help mutual funds recover from any further potential losses in Meta stocks.
Therefore, even though every bet in the portfolio does not turn out to be a winning one, investors still benefit from the likely growth in other securities. The fund managers also have the flexibility to make changes to the portfolio if a stock/sector has a negative outlook.
Things to keep in mind when you invest in International Funds
International Funds offers your portfolio a diversification across geographies. But while investing in International Fund carries benefits, certain risks also exist, viz. country and/or region-specific macroeconomic risk, geopolitical risk, regulation risk, and currency risk.
Any changes in government regulations and policies relating to companies, industries, investments, and so on, may make the investments unattractive. Bear in mind, geopolitical tensions can also affect the fund’s performance.
Moreover, international funds have exposure to foreign currency assets, that means, fluctuations in the exchange rate can affect your returns positively or negatively. For example, if you have invested in a mutual fund focused on the US market, your returns may drop if Indian Rupee appreciates and US Dollar becomes weak.
Though there is a growing popularity for international funds, invest in them only if you have a well-diversified exposure to domestic equities. Ensure that you have a high risk appetite and have the ability to bear the volatility and risks associated with overseas investments. In addition, your investment horizon should be at least 5 years. Furthermore, read the Scheme Information Document carefully to understand the scheme’s investment mandate — investment strategy, asset allocation, risks involved, etc.
International funds are taxed as debt funds unless 65% of their assets are held in Indian equities. Short-term Capital Gains (for a holding period of less than 36 months) is taxable as per your tax slab, while Long-term Capital Gains (for a holding period of more than 36 months) is taxable at 20% with indexation benefit.
A combination of factors as mentioned above will decide the level of return you can expect from an International Fund.
Ideally, do not hold international funds as a part of your core portfolio. Instead, use it as a tactical satellite allocation to boost portfolio returns, limiting the overall exposure to 10-15% of your equity investment.
Remember that a healthy portfolio is the one that takes calculated exposure across different asset classes, so that if one asset class fails to generate lucrative returns, other asset classes can protect your portfolio from financial loss.
This article first appeared on PersonalFN here