Right since their launch, mutual funds have endeavored to offer schemes that suit investors from all walks of life. This explains the manifold mutual fund types in existence.
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. To add an element of geographical diversification, fund houses developed international funds.
International funds in detail
“Risk comes from not knowing what you’re doing” – Warren Buffet.
These famous words could have been about International Funds. There are many companies whose stocks are not listed in India. International funds give you an opportunity to invest and be a part of the growth along with the company.
In simple words, international funds invest in the international market (equities and/or debt). 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.
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.
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
Benefits of Foreign funds
- 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, globally, most countries have their own economic cycle. By investing in different countries, you can experience smaller crests and troughs in your returns.
- You can utilize this exposure to foreign money to meet bigger financial goals like your child’s wedding or education.
- When it comes to overall value, Indian equities do not come cheap. Market experts say we might have already hit the market high. A wisely-picked International Fund can balance this out.
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 as well. Know these risks to be able to invest judiciously.
Risk of volatility: 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.
Requires constant vigilance: Political, social and economic aspects in different countries can impact mutual fund performances differently. The investor requires exceptional interest in investments to keep track of the market movement regularly.
Dual market risk: The other country’s current market fluctuation and the sectorial market (real estate, IT etc.) can impact the fund performance.
More tax liability: There is also the issue of taxation that could prove to be a potential minefield. Since hybrid global funds invest 65%-70% of their corpus in domestic companies and the balance in overseas markets, investors in these funds are subject to LTCG.
On choosing an International Fund
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.