Should you join the international mutual fund bandwagon?
These funds are also known as overseas or foreign funds. These can be a suitable investment vehicle for investors who are looking at long term opportunities and portfolio diversification elements beyond those available to them in the Indian markets.
In 2015, it was decalred that the European stocks had been the world’s top performers. The same year, it was reported that Japan’s benchmark stock index had outperformed and had climbed to its highest level in 15 years. But back home, in India, it was a turbulent year for Indian stock markets due to a plethora of factors.
The above is one of the many examples that highlight that stock indices of different countries do not exhibit the same performance in a certain time span. Yes, in times of unprecedented crises, there may be a strong ripple effect that permeates global markets but the magnitude of the impact is seldom similar.
In an increasingly global world, investors are slowly warming up to the realization of not limiting their investments to the domestic market. To put things into perspective, a report published by Mint stated that India constitutes just 3 percent of the global GDP share which means that Indian investors have around 97% of untapped market where they can look at for investment opportunities. International mutual funds, hence is something that every investor should consider adding to their portfolio.
What are international mutual funds?
International mutual funds are those who primarily invest in equity, equity-related instruments and debt instruments of companies listed outside India. These funds are also known as overseas or foreign funds. These can be a suitable investment vehicle for investors who are looking at long term opportunities and portfolio diversification elements beyond those available to them in the Indian markets. There are three types of international mutual funds.
• Global funds: You may get the impression that global funds and international mutual funds are synonymous but there is a difference. Global funds invest in companies in countries across the globe including the investor’s home country while international mutual funds invest in companies of all countries except those of the home country.
• Regional funds: As the name suggests, regional funds invest in companies from a specific geographical region, for instance Europe or South East Asia. Investors who have knowledge about regional markets can buy multiple regional funds instead of international or global funds.
• Country funds: Country funds invest in the companies belonging to one foreign country. The advantage here is that investors do not have to monitor cross geographical data and they can benefit from a specific country’s economy.
• Global sector funds: In this case, the focus is on investing in companies of a specific sector across various countries.
Benefits of investing in international mutual funds?
It is impossible for one country or region to be at the top of the race in the markets all the time. By investing in international mutual funds, you can diversify your portfolio significantly and tone down your risk because you will have the investment opportunity to enter across different markets, risk ranges and sectors etc. This way you can gain advantage of global markets and give your portfolio exposure to sectors and companies which you won’t be able to by confining yourself to Indian markets. Through international mutual funds you also have the chance of investing in best companies across the globe. Deepak Chhabria, CEO of Axiom Financial Services explains, “Today average middle-class Indians are consuming products and services offered by global brands that are not listed here. Many of these brands enjoy huge market share in India, the only way to participate in the growth of these brands is through international investing.”
Economies of different countries simultaneously go through different growth cycles which maybe unrelated but studies have indicated that correlation reduces in the long term. Thus when you invest in other economies through mutual funds you can manage risks better and support overall gains even if your primary market underperforms. This balance ensures your portfolio volatility is maintained at the right levels your overall returns are not impacted drastically when the Indian economy may not be doing so well but others could be. Chhabria says, “There have been periods when Indian Benchmark indices have significantly underperformed global indices like S&P 500. In the last 10 years for instance CY 2011, CY 2019 and CY 2013 saw significant underperformance of Indian markets. During times like these diversification can be a saviour. The following comparison makes it clearer.”
Through international diversification, you can tap into the powers of exchange rate fluctuation to grow your wealth. Foreign investments can go a long way in providing a buffer against rupee depreciation. When the rupee falls against the currency of your chosen international market, then you get more rupees per unit of the currency invested and the net asset value (NAV) rises and on the other hand when the rupee appreciates, the NAV decreases. For instance, if you invest $2,000 in an international mutual fund when 1 USD = ₹70, your cost of investment in the native currency would be ₹1,40,000. Now if after a few months, the exchange rate climbs to ₹75, your investment value will be ₹1,50,000. This means that you will have made a profit of ₹10,000 from currency fluctuations alone.
Chhabria narrates, “Since independence, the average depreciation of the rupee against the dollar has been 3.75% pa. The currency depreciation effect is embedded in the returns and while the reverse too can happen, the trend so far has been favourable for investors.”
The mutual funds route
Mutual funds are the best way to invest in international markets. This is because if you choose to invest directly through shares, you will have to seek the services of a domestic or foreign broker which will involve brokerage and currency conversion charges and a long and tideous documentation process because of the need to comply with the rules pertaining to offshore investments. Whereas, with mutual funds you can you can choose between an international fund investing directly into foreign equities or a fund of fund (feeder fund) that invests in funds with direct exposure. What’s more, you do not have to worry about following market dynamics and global events closely because fund managers will take care of that aspect with their technical expertise and their experience of investing in foreign markets.
• An investment horizon of over 3 years or more is ideal in international mutual funds as it will flatten the risk of short term geopolitical events. It will also be beneficial from the perspective of taxation as these funds are taxed like debt funds and you can reap the benefit of indexation through long term capital gains tax.
• Analyse the past performance of schemes and the pedigree of the fund house. Read the offer document carefully and ask for clarifications (if any).
This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund.