Risks and rewards of investing in international mutual funds

By Abhishek Dev

The Indian market currently has more than 50 international mutual fund schemes. While some funds are fund of funds (F0Fs), the majority of newly launched or existing funds are actively managed, which means a lot will depend on the fund manager’s ability to execute. The four oldest funds (10 years or older) oversee around Rs 12,000 crore in assets.

Before moving ahead, let us understand what are international mutual funds. These funds invest a majority of their investible corpus in international markets. These funds typically invest over 95% in equity and equity-related instruments of a foreign country/Funds. The main distinction between international and regular mutual funds is their exposure to foreign companies as opposed to domestic ones. With an influx of investors looking for global investment options let us understand them in detail:

Provides diversification

It is a known fact that different economies perform in different manners. Thus, they provide exposure to markets with different economic cycles and growth potential which are not available through domestic mutual funds. This helps in both geographical diversification and the growth potential of global economies.

Lower correlation

Developed markets historically have an overall volatility of approximately 15% approximately, whereas that of emerging markets has been well above 20%. The correlation between the world markets and India currently stands at about 0.25 and 0.13 between US and India. Therefore, having some exposure, i.e. 20% helps.

Professional management

Managers managing such funds have global expertise who monitor global market trends for analyzing companies. Thus, you also get the benefit of superior market analytics.

Exposure to global market leaders

We live in a global world where things can happen in few clicks. We consume international products, why not earn from their performance as well? Many-a-times there are sectors and companies which are not available in the domestic market, thus, foreign mutual funds help gain exposure to a broader range of markets and help in reducing the overall risk.

Remaining invested for the long run helps in mitigating investment risk. Investors can take the aid of these funds to target their lives’ long term financial goals.

Important to note that in addition to exposure to foreign companies, this also provides you exposure to other currencies (i.e. USD) as most underlying investments are in global currencies. A depreciating trend in Rupee vs these currencies may add to your returns and vice versa.

But before plunging in the same, it is important to note that there are some added risks involved like currency fluctuations and political instability in certain global markets. Therefore, it becomes important that investors should not just get into a fad of investing overseas as we last saw in late 2021. You are your best judge in estimating your risk levels. Having a well-diversified portfolio spread across various asset class and thinking long term helps.

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