International Funds are the mutual fund schemes of a country which invest in the shares of companies and securities of other countries. In short, it means that investors in India can invest in foreign companies through international funds. Investors who want to add more diversification to their portfolios by not limiting their investments to domestic shares and papers may look beyond the domestic market.
In recent years, there has been a growing trend among investors to opt for international funds as part of their diversification process while reducing investment concentration risks. It is a well-established strategy by long-term investors to not concentrate their investments in a particular asset, share or geographical market. It augurs well as it adds a certain amount of safety to the investment while the risk is further mitigated.
Adhil Shetty, CEO, Bankbazaar.com, says, “It’s advisable that one should also look beyond the domestic horizon and take benefits of the international investment trends. Though most domestic investors continue to stick to India’s growth story, there is no harm in harnessing the growth of other countries by allocating a certain percentage of your portfolio.”
Reasons which make an allocation to International Funds a good proposition
First and foremost, an investor should understand that capital markets of all countries do not always perform in sync. Depending on the various macroeconomic factors, government policies and geo-political turmoil, different markets’ performances differ. At times, the disparity turns out to be too wide, making certain countries’ markets relatively more attractive than the others. It is often seen that when domestic markets or emerging markets are buoyant, their counterparts in the western world or developed economies are in a weak phase. Having exposure to the world’s markets through international funds puts you in a sweet spot to benefit from the growth of other countries.
For instance, if you look at the US-based indices like S&P 500 and NASDAQ, they have recently corrected from their peaks by as high as 32%. In some cases, the fall is much more than what was seen in the Indian small and mid-cap stocks. During the same period, Indian indices did not fall that much, and the recent recovery has been far more robust than the US markets. This clearly means there is an immense opportunity for Indian investors to benefit from the US markets by investing through International Funds.
Following are the benefits of investing in International Funds.
a) Diversification into various geographies: International funds aid in expanding your geographical spread in the investment portfolio. An investor will be exposed to foreign markets, strengthening the risk mitigation strategy. It ensures that an investor’s risks and returns are spread across more than one country’s stocks, which proves to be a better risk management approach.
b) Asset Allocation: Asset Allocation is a key for wealth generation. Your investments, which are concentrated in one country, get the opportunity of allocation to other countries’ financial assets. It helps an investor get the benefits of various financial markets as you stand to win from diversified exposure.
c) Fresh Investment Themes: Investment into new businesses adds extra flavour to your portfolio. Since foreign markets are more developed than ours and provide themes and business opportunities which are either not available in India or are not prevalent, international funds make domestic investors international when it comes to their investment portfolios. Therefore, Indian investors are not left out of accessing the benefits of international investment trends.
d) Offers Hedge against Currency Risk: Investments in international funds tracking US indices offer a significant hedge for depreciating Indian Rupee against the US Dollar, which is typically considered a safe haven. Domestic investors tend not to give much importance to currency risks. However, if managed well, the movement in the exchange rate would help yield much better returns.
It may be noted that currency risk management is essential when it comes to investments. Investment in international funds helps you get the benefit of the depreciating rupee. In the current scenario, the Indian currency has steeply depreciated against the USD at a level of 80. Let’s assume that investors had invested in international funds when the Indian Rupee was 70 against the USD, and the US market did not perform at all during this time. Even then, thanks to the exchange rate movement, investors would have made returns in excess of 14%.
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How to invest in International Funds?
Investing process in international funds is no different than investing in any mutual fund scheme. There are various US Index-based funds available in India from different fund houses. If you are tech-savvy, it can be done digitally with a tap of a few clicks. Else, you can always visit the mutual fund branches or call your financial advisor to do the needful. If you wish to invest through the SIP mode, you can go ahead. Lump sum investments can also be made.
However, given the well-established track record of SIPs, in the long run, it is advisable to go through the SIP mode in International Funds as well to get the benefits of averaging costs. It is worth mentioning that given the fall in the foreign markets, particularly the US, the risk-reward ratio appears favourable for long-term investors.
These tips will help you better decide about international funds and investment.