Planning to go for international equity in your portfolio? Keeping these three things in mind can make a lot of difference in the outcomes you will see.
International funds are all the rage in mutual fund investing these days. As of June 2021, there are nearly 50 international funds to choose from. Five years ago it was half of this.
The most recent launch is an international fund of funds, which will invest in five different international funds available in the domestic mutual fund industry.
Seeing all this activity, you may be tempted too, to add these to your portfolio basket. However, there are some basics you should consider before taking the plunge.
1. It’s not without risk
Undoubtedly some international funds have performed very well in the last 5-10 years. Five-year annualized returns for some have been upwards of 20%. Others, saw returns languishing at low single digits. Choosing and monitoring your international fund is important.
You are investing in a different geography, and in a theme, that’s potentially unfamiliar. Thus, judging the long-term risks of investing in a particular international fund can be challenging. Good advisory helps here.
2. Keep in mind the currency impact
In most cases, you buy units of an underlying fund registered in a foreign capital market. You will invest in Indian rupees. This amount gets converted into the overseas currency that the underlying fund is issued in.
When you redeem, the units are sold in overseas currency. Then, the amount is converted back to rupees and paid out. If the Indian rupee has depreciated against the currency of the underlying fund, you will gain from the currency transaction and vice versa.
For all major currencies across the globe, US Dollar, Pound Sterling, Euro, and so on, the Indian Rupee usually depreciates over time.
Got any physical assets in overseas markets or remittances? You can plan your investment accordingly as it can potentially hedge your cost of buying.
3. Go for diversified options rather than themes
The choice in international mutual funds is vast. It’s easy to lose track, get confused, make the wrong choice or pile on too many different schemes.
A good rule of thumb is to avoid very specific themes in this space. The risk of those themes underperforming, in the long run, can be high.
Funds like DSP World Energy Fund, or the DSP World Mining Fund or the HSBC Brazil Fund or the ABSL Commodity Equity Global Fund, were all launched with much fanfare a decade or more ago. They are languishing with poor returns now.
So what to do?
- Funds with diversified portfolios investing across themes, or geographies, can be less volatile options.
- If you are familiar with businesses in a particular geography, that can be a more intuitive choice for you.
- Don’t load up on too many international funds. This is ideally only a portion of your overall portfolio, two or three diversified funds across geographies should be enough.
What’s the upside?
Adding international funds gives you good portfolio diversification. When Indian capital markets are struggling, you can benefit from divergent performance in some international themes. It is, however, hard to say which ones will do that the best.
Know very little about the economy and the type of companies you will get exposure to through the international funds? Then, keep your exposure limited and ensure adequate portfolio diversification.
Plan to benefit from economic productivity across the globe, but exercise restrain so that you don’t face the harsh risks too.
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