Right since their launch, mutual funds have endeavored to offer schemes suited to the different needs of investors. With people getting increasingly aware of investment options around the world, the need for diversification of the portfolio to spread the risks and offer an opportunity to earn profits from different markets drove fund companies to come up with innovative schemes. Many investors seek diversification in their portfolio of investments across market types, sectors and risk classes. To add an element of geographical diversification, fund houses developed international funds.
What are international funds?
In simple words, international funds invest in the international market (equities and/or debt). Broadly, these funds are of three types:
- Direct investment in the International markets
- Investment in an existing global fund
- Investment in several international funds
Apart from the way they are invested, international funds can also be focused on a country, region or a theme. Here are some examples:
- ICICI Prudential US Blue Chip Equity Fund: which invests in equity and equity related securities of companies listed on New York Stock Exchange (NYSE) and/or NASDAQ.
- Aditya Birla Sun Life International Equity Fund – Plan A: which invests exclusively in international stocks to create a portfolio of high geographical diversity.
- DSP BlackRock World Mining Fund: which is a Fund of Fund and invests in units of the BlackRock Global Funds – World Mining Fund.
These funds are ideal for someone who is willing to research well before investing.
Who should invest in International Funds?
International funds offer a wide range of benefits. Diversification, usually works wonders for any portfolio. Adding an element of geographical spread can help you counter sharp downturns of Indian markets and/or economy. 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. 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.
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
However, you must also consider two important elements before signing the dotted line:
- Risks involved – Investing in stocks has its own set of risks. International funds have an additional risk of currency. The currency market is highly volatile. As an investor, you invest in INR but the fund house has to take exposure in different currencies. So, in an 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.
- Taxation – International funds are treated similar to domestic debt funds. So, short term capital gain tax is applicable for a holding period of less than three years and long term capital gain tax is applicable for more than three years.
How do I chose an International Fund?
Before investing in an international fund, it is important to understand that these funds are investing in economies of other countries which can be affected by the social, political and natural factors. You need to be willing to research well before investing as well as during the term of holding the investment.
- 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.
International funds offer a great opportunity to diversify and earn returns by being a part of the growth story of companies around the world. However, these come with their own set of risks. Be prudent and invest judiciously.