US market in bear zone, should you invest in US dedicated MFs?

The key equity indices of the US market are experiencing one of their worst falls in the month of December. Since 1970, it is the third largest monthly fall witnessed by the US broader market index S&P 500. The other two instances when the market fell higher than this was in October 1987 and October 2008. There is no apparent reason for such fall currently as there was during the earlier two instances like ‘portfolio insurance’ during 1987 and ‘Lehman Brothers Financial Crisis’ in 2008.


 
The Indian market has not remained immune to such a fall, however, the worst impacted are the funds that have invested or derive their performance from the US market. There are almost 10 funds that have a significant presence in the US market and they have also performed in-line with the US market.  At the time of writing this article, data till December 20 was only available and hence there may be some difference in their performance.


 
Should you invest in them now?

Such a drastic fall in a single month may lure many investors to increase their exposure or start fresh investments in these funds. However, before committing any funds you should keep these two things in mind. First, their tax treatment is not like equity mutual fund but is akin to debt mutual fund. International funds held for more than 3 years are eligible for indexation benefit and an investor will have to pay tax at a rate of 10 per cent with indexation benefit otherwise at a rate of 20 per cent.
Besides, the empirical result shows that after such a huge fall, the next month has given a positive return six times out of nine times that is 66 per cent of the time.


 
Therefore, investors willing to take the risk can now invest in the mutual funds that are investing in the US equities. Nevertheless, they should not take exposure greater than 10-15 per cent of their portfolio.