Should mutual fund investors invest in the “whole market”?


As global central banks prepare to normalise (read: raise) interest rates, the equities market is anticipating turmoil. Diversification and methods of diversification are hot topics these days.

You can diversify your assets by (a) taking a portion of your stock gains and investing the rest in other asset classes such as debt or gold. (b) switching to low-beta defensive funds, and (c) geographic diversification.

Though it may appear that in today’s world of information flow and market interconnection, all markets would go in the same direction, this is not the case. However, there is little link between markets.

Returns from the Indian equity market will differ from those of the United States, which will differ from those of China or Europe if we plot the returns by calendar year. The reason for this is that fundamental factors, such as demand and supply, are different.

The United States has the world’s largest equity market in terms of market capitalization and the world’s largest economy in terms of GDP. One possible source of concern is that when the US Federal Reserve raises interest rates and reduces the amount of excess liquidity in their system, the equity market will suffer.

That goes against the grain of portfolio allocation, which should be based on your investment goals and risk tolerance rather than market predictions. Another counter-argument could be that India is now the world’s fastest-growing economy in terms of percentage GDP growth, so why go to other markets?

What are the benefits of investing in the US market? Due to the minimal correlation with the US market, you are diversifying your portfolio risks and rewards. With the global interest rate cycle about to turn, global capital will flow to the United States rather than India.

Another benefit is that a feeder fund in India accepts money in INR, transforms it to USD for investments, and then converts it back to INR when you redeem.

We even discussed the idea of purchasing the entire market. ETFs and Index Funds track an index, which is usually a large cap stock index or a broader index that covers a broader segment of the market. There are also funds that invest across the board.

That is to say, almost all publicly traded stocks. Mirae Asset Equity Allocator Fund of Funds (FoF) and Nippon Passive Flexicap FoF are two options in India.

Passive investing is represented by ETFs and Index Funds, in which the fund management merely follows an index. The goal is not to outperform the benchmark; rather, it is to save money because the fund’s operating expenditures are lower than active funds.

Navi MF has established the Navi US Total Market Fund, a Fund of Fund that will invest in the Vanguard Total Stock Market ETF, which invests in the whole US market across over 4000 businesses, encompassing about 99 percent of US stocks.

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