While local investments continue to perform poorly, International mutual funds provide a great alternative for investments. Simply put, International mutual funds invest in overseas funds, funds in countries abroad.
While the investor is made aware of the fact that his investments are exposed to higher risks, but the returns in the medium term, say a period of 5 years is definitely higher.
The options available to the investor’s willing to invest in best mutual funds are in abundance as foreign firms, and fund houses are coming up with diverse schemes for people who are interested in investing in different sectors and market types and across risk classes.
Why Should You Invest in International Mutual Funds?
The most logical reason behind investing in foreign funds is the benefit of diversification that the investor can reap after he has invested in the overseas fund for a medium or a long term. Even if the value of investments continues to stoop low in the domestic market, higher returns from international funds will try to mellow down the effect.
Another big reason is that foreign investments ensure smoother returns even when the domestic market faces a topsy-turvy.
Investment overseas can be the game changer we were looking out for. Experienced investors who want to have more depth and experience about international markets and investments may go for it.
Types of International Funds
Before you start investing overseas, you must have some idea about funds and its types. International Funds can be broadly classified into four categories:
- Global funds- As the name suggests, global funds are the funds available across the world, even in the home country. There is a thin line of difference between global and international funds. While international funds are the ones prevalent in International markets only, global funds are present in the home country too.
- Regional Funds- Regional Funds are funds available in any particular geographic region.
- Country funds- These are funds available exclusively in a particular country. Investors can easily decide if they would like to invest in country funds by analyzing how the investment market in the country performs.
- Global Sector Funds – A particular sector may perform fantastically in the global market, and therefore, the returns may be alluring for many to invest in the sector.
This broad classification of international funds may be narrowed down to:
- Open-ended Funds – These funds cater directly to the investor and the investor can purchase as many shares as he wants. These funds are majorly available in any international market, and many investors invest in them according to their Net Asset Value (NAV). There are fund managers who take care of the fund portfolios for each fund. When the total accumulated investments are no more manageable by the fund manager, the fund is closed to the new investors.
- Exchange Traded Funds – Exchange Traded Funds got their names from the fact that these funds are traded in the stock exchange. These funds are more popular among investors as they aim to provide higher returns within the minimum possible cost and these are also Tax Saving Mutual Funds. Other benefits that come with ETFs are tax efficiency and flexibility.
- Equity Funds – These funds are ideal for investors who are investing in the international market just to experiment or have an experience. For the ones who do not have much idea about international funds and their types or any other detail regarding the funds must go to Equity Funds as it doesn’t involve high risk and doesn’t require the investor to invest large amounts. Equity funds have quite many variations and are distinguished by geographical area, the pattern of investment and the size of the company.
- Bond funds or Debt funds – Debt funds are classified by the maturity of the fund. These funds highly attract investors who keep the safety of their investment as their first preference. Debt funds have characteristics like diversification, professional management of the fund, ease of liquidity, etc. Moreover, the investor can take advantage of the tax benefits that come with debt based funds. Risk-taking investors may go for high-yield funds which aim at providing higher returns but involve high-risk factor, and a cautious investor may invest in Municipal bond funds which involves low risk.
- Money market funds – These are funds which add up to a total of 26% of the mutual fund assets available for investment in the US. Money market funds provide high liquidity but yield lower returns and are low-cost funds.
Advantages of going for International Investment
There are several advantages of international investment, and sure, it is best to encase these advantages when small domestic markets like India perform poorly. In a scenario when the NAVs of your investments come crashing down, having invested in international funds will have your back and compensate for the losses from investing in the domestic market.
Here are some advantages of international investment:
- Professional management of investments- Portfolio managers are highly skilled and experienced in managing the portfolio of investments. The fund managers do everything from determining the holdings under the fund to observe the stock sales and purchases. Therefore, the investor is free from any a headache relating to mutual fund investment and can rely on the professional management of his investments by the fund managers.
- High liquidity- Funds in the international market are redeemable at any day of the year without any hassle, and so the funds are said to have high liquidity. International market too has the value of its funds dependent on the market conditions, and therefore, the amount that the investor may receive upon redemption may be below the original cost of the unit.
- Diversification of portfolio- High diversification of the investment portfolio is necessary as the market risk is divided into some funds, each involving minimum risk factor. The portfolio must be a mix of investments with high, low and medium risk. The effect of diversification is more recognized when the market is down. Profit from some funds can neutralize losses arising out of some other funds and thus, maintaining a smooth performance of the portfolio.
- Convenience- Tracking and monitoring of international funds is no problem at all as every detail relating to the investment like dividends received, account statements and tax statements shall be mailed to the investor duly which is highly convenient for the investor.
To conclude how investing international can back up your domestic savings and why you must do that in order to offset Rupee fall let us touch over a few significant points again:
The money that an investor puts in dollar-denominated assets is affected by the underlying portfolio which determines the yield from the investment. However, the returns are also impacted by the dollar and rupee exchange. Weaker Rupee against Dollar boosts the return from the fund while a stronger Rupee value may cause the returns to fall short. But since the NAV of the asset is only determined after converting the total value of dollars in the local currency, one may just take advantage of a weaker rupee to earn higher returns.
The Indian market is still underdeveloped due to a number of reasons. It’s correlation with the global market is almost negligible. Therefore, investing international can take the investor a long way, providing him with the exposure to the global market. And never forget to reap benefits from diversification which shall make sure your investment journey progresses smoothly.