1. International mutual funds
An international fund is a mutual fund that invests in firms in countries other than the ones they reside. It is also called overseas or foreign funds. Investing in them may mean more 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 greater 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.
2. Who should invest in foreign funds?
International funds give you an opportunity to invest and be a part of the growth along with the company. Smart investors have always been lured towards overseas funds for umpteen reasons. One, as you know, is diversification. Two, 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 international market (equities and/or debt funds). However, this is not for lazy or passive investors. International funds require careful and continual market research. The investor should be sure of his investment goals, both short-term and long-term, before venturing in. Check vintage and track records that will help you zero in on a fund that suits your sensibilities.
3. Features of international funds
International funds offer a great opportunity to diversify and earn returns by being a part of the growth story of companies around the world. Like any other type of investment, investing abroad has its own set of risks and benefits as well. Understand them well to be able to invest judiciously.
a. Risk factor
Currency exchange rates go through highs and lows all the time. 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, the investor requires exceptional interest in investments to keep track of the market movement regularly.
c. Scope for better market returns
By capitalizing on multiple economies simultaneously, your portfolio can fetch higher returns. Aside from mitigating risks by diversifying, overseas investing also boosts your portfolio quality.
d. Dual market risk
The other country’s current market fluctuation and the sectorial market (real estate, IT etc.) can impact the fund performance. Hence, it needs a lot of research and contemplation to make an informed choice.
There is also the issue of taxation that could prove to be a potential minefield. 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 subject to long term capital gains tax.
4. International funds – past performance
The following table shows how international funds have performed over different time periods.
|Average returns of the international funds category|
|1-year returns (%)||3-year returns (%)||5-year returns (%)||10-year returns (%)|
As on 27 October 2017
5. 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, the next year. At a macroeconomic level, most countries have their own economic cycle. Hence, by investing in different countries, you can experience smaller crests and troughs in your returns.
b. Can contribute to a cost-effective portfolio
You can utilize this exposure to foreign money to meet bigger financial goals (like your child’s wedding or college education). When it comes to overall value, Indian equities do not come cheap. Market experts say we might have already hit the market high. 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 the adequate knowledge about the foreign country’s economy and the industry there. Here, a qualified intermediary can assist. Therefore, you can gain exposure to global market even if you are not familiar with it.
6. Types of International Funds
a. Global Funds
Even though they sound synonymous, global funds and international funds are not one and the same. Funds available across the world including the home country are global funds. On the other hand, international 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 regional 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 nation, it’s called a country fund. Hence, it becomes easier for you to study their market and decide accordingly.
d. Global Sector Funds
Paying close attention to a specific sector of the economy in overseas countries, global sector suits investors interested in that sector. Therefore, they mainly aim for exposure to a particular sector.
7. Things to keep in mind when investing in international funds
If you wish to foray into international funds, research well before investing as well as during the term of holding the investment.
Here are the top 5 mantras for beginners.
- Follow the basic principles of investing in mutual funds
- Read the offer document carefully
- Understand the investment objective of the fund and the risks it intends to take
- Analyze if these aspects coincide with your individual investment strategy
- 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, go for a 10%-15% allocation to foreign funds. For instance, the US is deemed less risky when it comes to risk, returns and rewards. However, Chinese Funds, notwithstanding their high one-year returns, has already become riskier. So, it is best to use overseas funds to supplement to your main domestic fund portfolio.