International Mutual Funds: Have you diversified?

If you have been tracking 1 year performances of mutual funds, you might have noticed a bizarre fact that 9 out of the top 10 schemes are all international funds.

And if you think this might be due to recent movements in the indices, think again – even over a 2 year horizon, 5 out of the top 10 schemes are international mutual funds!

If you still haven’t invested a part of your portfolio – about 5% – in international funds, you might want to start doing that especially if you believe in a 3-5 year horizon for equity investing.

Most people aren’t doing this yet – international funds account for a mere 0.3% of the total corpus in equity funds which is abysmally low. You might want to make a start!

Lets tell you why!

What are International Funds?

As the name suggests, an international fund/overseas fund invests in the international markets. Investments of these funds can be either in equity or debt or in other asset classes such as commodities, real estate, among others.

In addition to creating opportunity to invest globally, these funds help individuals achieve geographical diversification and at times serve as a hedge against the falling domestic currency.

A mutual fund which predominantly invests (greater than 80 percent of its assets) in foreign countries’ equity or equity-related instruments is classified as an International Equity Fund. As per SEBI re-categorization norms, these funds come under the Sectoral / Thematic category.

There are no clear-cut categories of international funds. However, they can be differentiated by investment features.

a) Target Category: For example, some funds are country-specific international funds while some are commodity-based international funds which invest in specific commodities.

Similarly, there are thematic funds which have specific criteria for investment asset class such as energy, agriculture, consumption, real-estate etc.

b) Investment Method: There are international funds that invest directly in international stocks, and others that invest in international indices such as the Nasdaq or the S&P 500.

There are some that act as feeder funds which invest in an identified mutual fund in the international market. Then there are fund of funds that invest in units of international funds.

Why International Funds?

  1. A good market Hedge : When the local economy doesn’t do well, like we haven’t, investing in international growth makes a lot of sense. An investment in US centric funds would have yielded a 20% odd return in the past two years when most Indian portfolios are down anywhere from 20% – 50% in the same period!
  2. Currency Hedge as well ! – Since Indian investors’ returns are in INR terms, any depreciation in the INR versus the USD will amplify returns and to that extent, provide a natural hedge to your corpus.
  3. Tax Arbitrage no more – Indian equities were earlier provided a tax break on long term gains while international funds are taxed at debt rates (20% with indexation benefit) – the previous years’ budget changed this by taxing long term gains at 10% and now the arbitrage is much reduced.

Word of Caution

While investing in International Mutual Funds.

The investors must be aware of certain things as well. When an investor is investing in an International Mutual Fund, he is exposed to a country -specific risk for all the countries in which the fund is having investments in.

This type of Mutual Funds may also pose currency risk. It influences the performance of the fund with any movement in the same. The returns are affected negatively by the appreciation of INR and positively with the depreciation of INR.

In addition to the risks associated with currency movements, international funds expose one’s investments to geo-political risk, which is country-specific, and beyond the control of anyone.

Since some funds are Funds of Funds, they charge their normal expenses as well as the expense of the underlying international scheme in which they are investing.

This may result in expenses being higher than the standalone funds. So, you need to keep an eye on the total expenses while investing in these funds.

How to Invest

Interested in knowing more or investing right away?

Just drop your PL Relationship manager a mail or write to us at wms@plindia.com and we will get your investment organized in a jiffy!

Contact with us by filling out the form below.

 

 

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