FUND FLAVOUR

April 2019

Geographical diversification…

With people getting increasingly aware of investment options around the world, the need for portfolio diversification is greater than ever. A diverse plan not only spreads the risks, but also taps earning potential of different markets. International funds add an element of geographical diversification to the manifold mutual fund types currently existing in the Indian mutual fund sector. It invests in firms in countries other than the ones they reside. It is also called overseas or foreign funds. International mutual funds follow a master-feeder structure. A master-feeder structure is a three-tier structure where investors place their money in the feeder fund which then invests in the master fund. The master fund then invests the money in the market. A feeder fund is based on-shore i.e. in India, whereas, the master fund is based off-shore (in a foreign geography like Luxembourg etc). A master fund can have multiple feeder funds. Investing in them may mean more risk exposure, but also chances of higher returns. People usually prefer it as an alternative and/or long-term investment.

… the lure!

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

– One is diversification.

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

– Three, exposure to international markets can only broaden your experience and expertise.

In simple words, international funds invest in the international market (equities and/or debt funds). However, they are not for lazy or passive investors as they need careful and continual market research. The investor should be sure of his investment goals, both short-term and long-term, before venturing in.

… the opportunity to invest judiciously!

International funds offer a great opportunity to diversify and invest judiciously by being a part of the growth story of companies around the world.

Better prospects – International funds offer better prospects. These funds invest in global companies. Global companies are good in terms of resources, facilities, standards and government cooperation. You can take advantage from some of the fastest-growing markets in the world.

Currency factor – These funds are highly dependent on fluctuations in international currencies. Any major change in the currency rate adversely impacts the performance of a fund.

Risk factor – Risk factors associated with the international fund is very high. The various risks associated with this fund are country-specific policies, geopolitical risk, market conditions, global economic conditions etc.

Require constant monitoring – Investment in this fund is prone to multiple risks. This fund requires constant monitoring.

Scope for better market returns – The return offered by this fund is likely to be high. It varies according to multiple parameters.

Diversification – The prime objective of this fund is to diversify the investment portfolio of an individual. Majority of such funds invest in different securities in different countries, aiming to have a wide array of investment instruments at their disposal.

International funds of various hues…

 

Even though they sound synonymous, global funds and international funds are not one and the same. Funds available across the world including the home country are global funds. On the other hand, international funds are those available only in other countries. Though there are no clear sub-categories of the international funds, they are broadly either country-specific international funds, commodity-based international funds or thematic funds that invest in sectors such as consumption, energy, real estate and agriculture.

By Geography-Different international funds invest in different countries and different types of markets. Some schemes such HSBC Emerging Market Fund invest money in HSBC global fund which primarily invests their funds in countries in Asia or Latin America. Mirae Asset China Advantage Fund invests in Mirae Asset China Sector Leader Equity Fund, which itself invests in companies that are domiciled, or have activity in China and Hongkong. Franklin India Feeder-Franklin US Opportunity or ICICI Prudential US Blue-chip Equity Fund invest in blue-chip companies/securities that are domiciled in the USA.

By Sector/Theme- Theme Based Funds or thematic funds invest in a particular theme. For example, if the theme is infrastructure, it would invest in infrastructure construction companies as well as companies related to the infrastructure business like cement, steel, etc. Some theme based funds are DSPBR World Energy Fund, L&T Global Real Assets Fund etc. These funds are for those investors who have already invested in plain vanilla international funds and already invested in domestic equity or funds but now want to buy something exotic.

Commodity Based Funds invest in commodities like gold, precious metals, crude oil, wheat, etc. Commodities offer diversification and also act as an inflation hedge, thus protecting the investors. Also, these funds could be multi-commodity or focused on a single commodity. Best commodity based international mutual funds are DSP Black Rock World Gold Fund, ING OptiMix Global Commodities, Mirae Asset Global Commodity Stocks, Birla Sun Life Commodity Equities - Global Agri Fund, etc.

FoF or direct investment- Some Global funds invest directly in companies abroad. Others are Fund of Funds; these funds collect the corpus from domestic market and invest in an offshore Fund of the same parent company. If the fund purchases the stocks or bond abroad directly, fund manager sits here in India and decides which stock to buy and hold. But, in case of FOF, Indian fund manager just collects or pools the fund from here and invests in their parent fund which is managed by fund manager who is sitting in the domiciled country where the money is invested. A fund manager who is abroad and managing the corpus from there knows the economy very well, and it is easy for them to monitor their own market.

…one up on their counterparts

Geographical Diversification

One country can never top the charts consistently – so even if you do not have a chance this year, there is one, the next year. At a macroeconomic level, most countries have their own economic cycle. Hence, by investing in different countries, you can experience smaller crests and troughs in your returns.

Can contribute to a Cost-Effective Portfolio

You can utilize this exposure to foreign money to meet bigger financial goals (like your child’s wedding or college education). When it comes to overall value, Indian equities do not come cheap. We might have already hit the market high. So, a wisely-picked International Fund can balance this out.

Portfolio Diversification

An investment portfolio has a combination of high, medium and low risk investments. Hence, when there is a market low in the home country, the one abroad can compensate for it.

International Exposure under Expert Management

You may not have adequate knowledge about the foreign country’s economy and the industry there. Here, a qualified intermediary can assist. Therefore, you can gain exposure to global market even if you are not familiar with it.

The report card…

International mutual funds are topping the return charts. The category has returned around 20% in one year. Motilal Oswal NASDAQ 100 Exchange Traded Fund, the topper in the category, has given as high as 27% returns in one year, 18% in three years and 19% in five years. ICICI Prudential US Bluechip Equity Fund has given 20.26% in one year and Reliance US Equity Opportunities Fund has returned 18.45% in the same time frame. Franklin India Feeder Franklin US Opportunities Fund has given 17.83% returns in one year and DSP US Flexible Equity Fund has returned 16.94% in one year. The current scenario underscores why investors need to diversify their portfolio across geographies. International funds open a window of great ideas for Indian investors. International funds are critical in an investor’s portfolio. The allocation can be anywhere between 5-20% depending on the size and needs of a portfolio.  There are diversified equity schemes in India which have an exposure to international schemes but they are limited in number. For example, Parag Parikh Long Term Equity Fund has some allocation to international stocks in their portfolio. However, it is better to opt for a pure international scheme.

Look before you leap…

If you wish to foray into international funds, research well before investing as well as during the term of holding the investment.

·         Understand the investment objective of the fund and associated risks.

·         Check the track record of the fund.

·         Look for experienced fund manager.

·         Make sure that the scheme you choose complements your current portfolio.

·         Read the fund facts carefully for the underlying cost and expenses.

·         Check if the country you choose has a tax treaty with India to avoid double taxation.

·         Do extensive research and if required take help from experts.

Opt for international funds

·         If you have surplus money after investing for the financial goal.

·         You are willing to invest surplus money for long term.

·         Your risk-taking capacity is very high.

·         You are not a passive investor and cautious about tracking your investments.

The bottomline…

While any kind of investment involves risk, investing in international funds presents unique risks including political, currency, regulatory and economic. The key is for the investors to do their homework and understand where the investment’s exposure will be. Understanding political risks can also be important before making any investment decision. To be vigilant, investors should set a target, monitor the allocation, and continually rebalance while keeping an eye on any developments within the portfolio. International mutual funds may not fit with a conservative person’s investment portfolio, but looking outside their domestic market may reward those investors seeking additional returns especially as global trade continues to expand and the world’s economies grow. Despite short-term volatility, historically, international equity markets have had favorable prospects for continued growth. International mutual funds can capitalise on that potential.