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International funds add an element of geographical diversification to the mutual fund. Currently, there exist numerous types of mutual funds in India. However, they are broadly classified as equity, debt, and hybrid mutual funds. We have covered the following in this article:

  1. What are international mutual funds?
  2. Who should invest in international funds?
  3. Features & benefits of international funds
  4. What are the advantages of overseas funds?
  5. How are international funds categorized?
  6. Things to remember when investing in international funds

 

1. International Mutual Funds

International mutual funds are those funds that invest in foreign companies. These funds are also referred to as overseas or foreign funds. Investing in these can be of higher risk exposure, but also chances of higher returns. People usually prefer it as an alternative and (or) long-term investment.

With people getting increasingly aware of investment options around the world, the need for portfolio diversification is more significant than ever. A diverse plan not only spread the risks but also tap earning potential of different markets. The fund houses are coming up with innovative schemes across market types, sectors, and risk classes, with more experimental investors entering the playground.

 

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2. Who should Invest in Foreign Funds?

Smart investors have always been lured towards international funds for umpteen reasons.
– One, as you know, is diversification.
– Two, the economic cycle varies for different countries, and simultaneous investment in different economies ensures minimal loss and possibly, smoother returns.
– Three, exposure to international markets can only broaden your experience and expertise.
In simple words, international funds invest in the global market (equities and/or debt funds). However, they are not for passive investors as they need careful and continual market study. Investors should be sure of their investment goals, both short-term and long-term, before investing. Check track record– they will help you choose a fund that suits your requirements.

 

3. Features of International Funds

International funds offer an excellent opportunity for diversifying and earning returns by being a part of the growth of companies around the world. Like any other investment, investing abroad has its own set of pros and cons. Understand them thoroughly to make an informed investment decision.

a. Risk Factor

Currency exchange rates fluctuate almost every day. For instance, in a US-centric international fund, if the rupee falls against the dollar, then you get more rupees per dollar invested – the NAV shoots up. On the other hand, if the rupee rises, then you get lesser rupees per dollar, and the NAV falls.

b. Requires Constant Vigilance

Political, social and economic aspects in different countries can impact mutual fund performances differently. So, investors must keep track of the market movement regularly.

c. Scope for better Market Returns

By capitalising on many economies simultaneously, your portfolio can fetch higher returns. Apart from mitigating risks by diversifying, overseas investing can also boost the quality of your portfolio.

d. Dual Market Risk

The other country’s current market fluctuation and the sectoral market (real estate, IT, etc.) can impact the performance of the fund. Hence, it needs a lot of research to make the right choice.

e. Tax-Efficiency

There is also the issue of taxation that could prove to be a potential pitfall. For instance, hybrid global funds invest 65%-70% of their corpus in domestic companies and the remaining in overseas markets. Therefore, it makes the returns that are subject to long-term capital gains tax.

International funds

 

4. Advantages of Foreign funds

a. Geographic Diversification

One country can never top the charts consistently – so even if you don’t have a chance this year, there is one, it may be the next year. At a macroeconomic level, most countries have their economic cycle. Hence, by investing in different countries, you can experience smaller peaks and falls in your returns.

b. Can contribute to a Cost-Effective Portfolio

You can utilise this exposure to foreign money to meet major financial goals (like your child’s wedding or college education). When it comes to overall value, Indian equities as well are not cheap. So, a wisely-picked International Fund can balance this out.

c. Portfolio Diversification

An investment portfolio has a combination of high, medium and low-risk investments. Hence, when there is a market low in the home country, the one abroad can compensate for it.

d. International Exposure under Expert Management

You may not have adequate knowledge about the foreign country’s economy and the industry. Here, a qualified intermediary can be of great help. Therefore, you can gain exposure to the global market, even if you are not familiar with it.

 

5. Types of International Funds

a. Global Funds

Even though they sound synonymous, global funds and international funds are not the same. Funds available across the world, including the home country, are global funds. On the other hand, foreign funds are those available only in other countries.

b. Regional Funds

If you invest abroad, focusing on a particular geographic region, then it becomes a local fund. Sometimes investors even buy multiple regional funds rather than investing in global funds with presence across nations.

c. Country Funds

When you invest in a fund only available in one foreign country, it’s called a country fund. Hence, it becomes easier for you to study their market and decide accordingly.

d. Global Sector Funds

A global sector fund gives close attention to a specific sector of the economy in overseas countries, and the global sector suits investors interested in that sector. Therefore, they mainly aim for exposure to a particular industry.

 

6. Things to keep in mind when Investing in International Funds

If you wish to make use of international funds for your advantage, research thoroughly before investing as well as during the term of holding the investment.
Following are the top 5 tips for beginners:
a. Follow the basic principles of investing in a mutual fund
b. Read the offer document carefully and ask for clarifications (if any)
c. Understand the investment objective of the fund and the risks it intends to take
d. Analyse if these aspects are in sync with your investment strategy
e. For region-specific funds, do some research and assess the feasibility of investing in those regions for the next few years. Similarly, for country-specific or commodity-specific funds.
If you’re a pro-investor with a good understanding of domestic and global markets, then go for a 10% to 15% allocation to foreign funds. For instance, the United States is deemed less risky when it comes to risk, returns, and rewards. However, Chinese Funds, notwithstanding their high one-year returns, have already become riskier. So, it is best to use overseas funds to supplement your main domestic fund portfolio.

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