What are International Mutual Funds, and should you go for them?

International Mutual Funds help you diversify globally, but also increase your risk.
Let us see when should we go for them...

What are International Mutual Funds

International mutual funds are those funds that invest in foreign companies. These funds are also referred to as overseas or foreign funds. Investing in these can be of higher risk exposure, but also provide you with chances of higher returns. People usually prefer it as an alternative and (or) long-term investment.

Pros : Why to Invest in International Funds?

Smart investors have always been lured towards international funds for umpteen reasons.

1/ Geographic Diversification

Diversification leads to lesser volatility in the overall portfolio. One country can never top the charts consistently – so even if you don’t have a chance this year, it may be the next year. At a macroeconomic level, most countries have their economic cycle. Hence, by investing in different countries, you can experience smaller peaks and falls in your returns.

2/ Less Volatility

The economic cycle varies for different countries, and simultaneous investment in different economies ensures minimal loss and possibly, smoother returns.

3/ Intellectual Growth

Exposure to international markets can only broaden your experience and expertise.

4/ Scope for better Market Returns

By capitalising on many economies simultaneously, your portfolio can fetch higher returns. Apart from mitigating risks by diversifying, overseas investing can also boost the quality of your portfolio.

5/ Hedge against Foreign Currency Spends Fluctuation

These funds can act as a hedge against any future dollar expense, say, funding an education abroad, or multiple planned international trips, or if you have plans to relocate abroad. Currency Fluctuations can play havoc on your budgeting if you are not invested in Foreign funds in such cases.

6/ Own World Class Companies

You get the satisfaction of holding some of the best in the world, in your own portfolio.

Cons : What you need be careful about when investing in International Funds?

1/ Requires Market Study

These funds are not for passive investors as the investors need to be careful with their market study. At a time when most investors struggle to study the domestic markets, studying and understanding international markets cane be a challenge.

2/ Risk Elevation

Over and above the performance of the fund, there is also a factor of currency fluctuation. Currency exchange rates fluctuate almost every day. 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.

3/ Requires Constant Vigilance

Political, social and economic aspects in different countries can impact mutual fund performances differently. So, investors must keep track of the market movement regularly.

4/ Taxation

International funds are taxed as debt funds, unless they invest at least 65% of their portfolios in Indian equity instruments. When treated as debt funds, short-term capital gains are taxed at the investor’s marginal rate of tax and long-term capital gains on investments held for more than 36 months is taxed at 20% with indexation benefits.

How much should be the Portfolio Allocation to International Funds?

If you’re a pro-investor with a good understanding of domestic and global markets, then go for a maximum of 10% allocation to international funds. In most cases, it should be less than 5%. For instance, the United States is deemed less risky when it comes to risk, returns, and rewards. However, Chinese Funds, notwithstanding their high one-year returns, have already become riskier. So, it is best to use overseas funds to supplement your main domestic fund portfolio.

What are some of the good International Funds available in India?

1/ Franklin India Feeder Franklin US Opportunities Direct Fund-Growth

2/ ICICI Prudential US Bluechip Equity Direct Plan-Growth

3/ DHFL Pramerica Global Equity Opportunities Fund Direct-Growth

4/ DSP US Flexible Equity Direct Plan-Growth

5/ Kotak Global Emerging Market Fund Direct-Growth

What are some good international markets to invest in?

1/ Not all international funds have performed well in the past one year. Funds invested primarily in the US markets did well, while those invested in, say, the Brazilian or Hong Kong markets did poorly. Selection of the right opportunity is, thus, important.

2/ One of the reasons for the good return performance of international funds in the last one year has also been rupee depreciation. The one-year return from such funds has been bolstered by the over 5% depreciation in the rupee against the US dollar in the same period. That may not have been the case if the rupee appreciated instead.

3/ A region that has lower correlation to Indian markets is preferred if one is using an international fund for diversification. In this regard, emerging markets are more correlated. So, a developed market like US would provide better diversification options.

4/ International funds have focused on US since the end of global financial crisis as US markets have proved to be more resilient than other advanced markets. The strong performance is expected to continue given the sustained improvements in their economic and corporate earnings growth. Additionally, investing in US-focused funds might also benefit investors from currency depreciation as falling rupee would further increase fund returns. Also, rising global commodity prices have increased the attractiveness of international thematic funds focused on commodities

Summary

While the diversification argument is a compelling one, the risk-reduction benefit of a small allocation on the portfolio may be negligible. A larger allocation may not be advisable given the risks associated with an unfamiliar market and geopolitical and foreign exchange risks.

That leaves the case for returns. Use these funds for some tactical allocation like a hedge for foreign currency spends (travel or education or relocation), or when there is a strong case for a particular economy or market to do well. If there is no such reason, in most cases, it is better to avoid these funds.

Regards

Manoj Arora
Official Website