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  1. International mutual funds: Great risks, great rewards

International mutual funds: Great risks, great rewards

Several international funds, including gold-based funds, commodity-linked funds as well as US-based funds, have given good returns in 2016. (See box 1). In fact, as a category, international funds returned close to 16% last year. However, it’s not a good idea to generalize the whole basket of international funds as one category, as different funds have vastly diverse themes.

Published: January 11, 2017 11:39 AM
There are three different kinds of international funds that asset management companies in India offer. The first is those funds that invest directly into global markets. There are three different kinds of international funds that asset management companies in India offer. The first is those funds that invest directly into global markets.

Several international funds, including gold-based funds, commodity-linked funds as well as US-based funds, have given good returns in 2016. (See box 1). In fact, as a category, international funds returned close to 16% last year. However, it’s not a good idea to generalize the whole basket of international funds as one category, as different funds have vastly diverse themes.

There are three different kinds of international funds that asset management companies in India offer. The first is those funds that invest directly into global markets. Then there are those called as feeder funds that invest into an existing global fund and the third kind are fund of funds, which invest in several different international funds.

Another reason why returns in this category can be extremely divergent is the fund objective. For example, there are some funds that invest based on a particular region. Then there are others that invest based on specific themes such as commodity-linked funds, gold-based funds etc.

On the face of it, 2016 seems to have been a great year for international funds, with some of the gold & commodity-linked funds giving returns ranging from 50% to 70%, which has boosted the category average returns to 16%. However, without these funds, and taking into account only the equity-based funds, the average returns fall to below 10%. Another important point to note is that the same gold & commodity funds that saw spectacular returns in 2016, have given negative or low single digit returns in a three-year window.

One of the biggest risks that come with international funds is the currency risk. If there is any fall in the currency of the country your fund is invested in versus the Indian rupee, then your returns will get impacted irrespective of how the fund’s performance has been.
It’s recommended that you don’t have more than one or a maximum of two international funds in your portfolio. Hence, the choice of fund becomes very important. For example, investing in an emerging market fund might not be the best idea, since India is already one of the best emerging markets in the world. It would perhaps make more sense to invest in a US-based or a developed market fund. Indian equities are far more volatile than US equities. So investing in a US-based fund has the dual advantage of geographical diversification as well exposure to a less volatile equity market that is otherwise not available in India.

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Also given the current economic environment, the US dollar is expected to appreciate against all major currencies. So investing in a dollar-denominated fund could provide a good hedge for your portfolio as well as provide an additional boost to your returns.

It might also be a good idea to stay away from thematic funds such as commodity or gold funds as they can be extremely volatile. If you’ve been invested in any such fund for the past few years and have been looking for an opportunity to exit, this might just be a good time to cut your losses.

International funds are a good avenue for getting a global exposure and diversifying one’s portfolio. While geographical diversification is a good idea, the choice of funds within the category should have a strategic fit in your portfolio.
Box 1

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