A global fund invests in high growth companies and helps in mitigating country-specific risk and volatility as it is not restricted to a specific region
By Jinesh Gopani
Courtesy globalisation, we are all consumers of global products in our day-to-day life. Whether it is our smartphone, the social networking apps we use or the e-commerce platforms we shop on, global brands have created a vast and sticky customer base in each segment in India. As consumers, we recognize the quality and scale these brands bring in. However, as investors, we tend to have a home bias, i.e., a preference to invest in domestic securities over foreign securities.
Now here’s why this is not an ideal situation: India accounts for only 3% share of the world’s market capitalisation. There are several investment opportunities in sunrise sectors like payments, ecommerce and transformational technologies. But these are not available on Indian exchanges. As a result, Indian investors miss out on earning returns from global economic growth. In order to participate in growth stories worldwide, you should consider allocating a part of your portfolio to a global fund. It is a type of mutual fund that identifies opportunities and invests inequity stocks across domestic as well as international markets.
Typically, Indian mutual fund houses work alongside an overseas fund which manages the investment in global markets. They are thus called fund-of-funds. Such flexible funds help you navigate global market cycles seamlessly and protect your portfolio from the downcycle in a single market. In other words, it helps you make hay not “when” the sun shines, but “wherever” the sun shines! Let us take a closer look at the advantages of having a global fund in your portfolio:
Strength in diversity
Different asset classes such as equity, gold, debt have little to no correlation in their performance. And that is why you build a diversified investment portfolio. In a similar manner, markets in different countries do not have a synchronised performance. There is very little correlation as each country has a different economic cycle. So even if your home market, India, is witnessing a bear run, a bull run in another market can help in generating returns. A global fund thus helps in mitigating country-specific risk and volatility as it is not restricted to a specific region.
While diversification reduces risk, it also helps in earning good returns. For instance, Nifty 50 has provided a compound annual growth rate (CAGR) return of 10.74% over the past decade. In the same period, a blended portfolio—i.e., 70:30 allocations to Nifty50 and MSCI World (Global Market) respectively, has provided a CAGR return of 12.29% (Source: Bloomberg, MSCI, Axis MF Research Data as on December 2020).
This difference is because a developed market like the US is home to some of the most disruptive and fastest growing companies. Investing in a global fund gives you the opportunity to invest in such high-growth companies and earn returns.
Similarly, tapping into emerging markets like Indonesia, Malaysia and Thailand gives you an opportunity to earn good returns in the long term. These economies are growing consistently and the same is reflected in their equity markets.
Hedge against inflation
When planning your investment, a common concern is about beating inflation. In other words, you want your investment to appreciate in value over a period of time. Traditionally, gold and real estate were preferred as a good hedge against inflation. But now, a global fund too has the potential to offer inflation beating returns. Investing in economies with lower inflation than India will allow you to reap returns in a medium to long term.
In addition to returns from stock appreciation, a global fund benefits from the likely disparity in the currency exchange rate. So, if you invest in a country whose currency is stronger than India, say, the US, then you can enjoy more rupee gain for every dollar invested
Though investing in global markets is lucrative, it requires in-depth research to identify the right investment opportunities. On this front, the experience of the fund management team—both domestic and offshore—comes in handy. They have a comprehensive research-oriented process which includes identifying and analysing opportunities in detail and actively monitoring the portfolio to ensure the investment objectives are met.
Considering these factors, a global fund could be a valuable addition to your portfolio. You can determine the allocation to a global fund based on your risk appetite, financial goals and investment horizon. Today, where buying any product across the world is possible sitting at one place, investors should use this opportunity to invest across the world to create wealth.
The writer is head, Equity, Axis Mutual Fund