In 2015, it was declared that European stocks had been the great performances. In the same year, it was reported that Japan’s benchmark stock index had outperformed and had climbed at its highest level in 15 years. But at home in India, it has been a turbulent year for the Indian stock markets due to a plethora of factors.
The above is one of many examples that highlight that stock indices from different countries do not show the same performance over a certain period of time. Yes, in times of unprecedented crises there can be a strong ripple effect permeating global markets, but the magnitude of the impact is rarely similar.
In an increasingly globalized world, investors are slowly preparing for the realization not to limit their investments to the domestic market. To put things in perspective, a report published by Mint said India only accounts for 3% of the share of global GDP, which means Indian investors have around 97% of the untapped market where they can look for investment opportunities. So international mutual funds are something that every investor should consider adding to their portfolio.
What are international mutual funds?
International mutual funds are those that invest primarily in stocks, equity-related instruments and debt securities of companies listed outside of India. These funds are also called foreign or foreign funds. These can be a suitable investment vehicle for investors looking for long term opportunities and elements of portfolio diversification beyond those available in Indian markets. There are three types of international mutual funds.
• Global funds: You may think that global funds and international mutual funds are synonymous, but there is a difference. Global funds invest in companies in countries around the world, including the investor’s home country, while international mutual funds invest in companies in all countries except those in the country. original.
• Regional funds: As the name suggests, regional funds invest in companies in a specific geographic region, for example Europe or South East Asia. Investors who are familiar with regional markets can purchase multiple regional funds instead of international or global funds.
• Country funds: Country funds invest in companies belonging to a foreign country. The advantage here is that investors don’t have to watch cross-geo data and can benefit from the economy of a specific country.
• Global sector funds: in this case, the focus is on investing in companies in a specific sector in various countries.
Benefits of investing in international mutual funds?
It is impossible for a country or a region to be in the lead all the time in the markets. By investing in international mutual funds, you can significantly diversify your portfolio and reduce your risk, as you will have the opportunity to invest in different markets, risk ranges and sectors, etc. This way, you can take advantage of global markets and give your portfolio exposure to sectors and companies that you cannot by sticking to Indian markets. With international mutual funds, you also have the opportunity to invest in the best companies around the world. Deepak Chhabria, CEO of Axiom Financial Services, explains: “Today, middle-class Indians are consuming products and services offered by global brands that are not listed here. Many of these brands enjoy a huge market share in India, the only way to participate in the growth of these brands is to invest internationally. “
The economies of different countries go through different cycles of growth simultaneously that may be unrelated, but studies have indicated that the correlation decreases in the long run. So when you invest in other economies through mutual funds, you can better manage risk and support overall gains even if your primary market is underperforming. This balance ensures that the volatility of your portfolio is maintained at the right levels. Your overall returns are not affected drastically when the Indian economy is not doing as well, but others could be. Chhabria says, “There have been times when Indian benchmarks have significantly underperformed global indices such as the S&P 500. Over the past 10 years, for example, CY 2011, CY 2019 and CY 2013 have experienced a significant underperformance of the Indian markets. During times like these, diversification can be a savior. The following comparison makes it clearer.
Through international diversification, you can harness the fluctuating powers of exchange rates to grow your wealth. Foreign investment can go a long way in cushioning the depreciation of the rupee. When the rupee goes down against the international market currency you have chosen, you get more rupees per unit of currency invested and the net asset value (NAV) increases and on the other hand when the rupee appreciates, the net asset value decreases. For example, if you invest $ 2,000 in an international mutual fund when $ 1 = ₹70, your local currency investment cost would be ₹140,000. However, 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 just currency fluctuations.
Chhabria says: “Since independence, the average depreciation of the rupee against the dollar has been 3.75% per year. The effect of currency depreciation is built into returns and while the reverse can also happen, the trend has so far been favorable for investors. “
The mutual fund route
Mutual funds are the best way to invest in international markets. This is because if you choose to invest directly through equities, you will need to use the services of a domestic or foreign broker, which will involve brokerage and currency conversion fees and a long documentation process and tedious due to the need to comply with applicable rules. offshore investments. While with mutual funds, you can choose between an international fund that invests directly in foreign stocks or a fund of funds (feeder fund) that invests in funds with direct exposure. Moreover, you don’t have to worry about closely following market dynamics and world events as the fund managers will take care of this aspect with their technical expertise and experience of investing in foreign markets.
Key points to remember
• An investment horizon of more than 3 years or more is ideal in international mutual funds because it will smooth out the risk of short-term geopolitical events. It will also be beneficial from a tax point of view as these funds are taxed as debt funds and you can profit from indexation through capital gains tax in the long run.
• Analyze past performance of schemes and the pedigree of the fund house. Read the offering document carefully and ask for clarifications (if any).
This article is part of the HT Friday Finance series published in collaboration with Aditya Birla Sun Life Mutual Fund.
