Do you know the forward 2018 PE ratio of India is 18 times where as for Brazil it is just 12.5 times. This means the equity market in Brazil is undervalued compared to us and can give better returns. Isn’t this we want when we diversify our portfolio and call for diversifying “geographically” too. Investing in International Funds in India is also possible and one can look this as an opportunity.
You often wondered how to invest in “Apple” or Mr. Buffet’s Berkshire Hathway. Is it possible? Yes, there are funds who invest in NASDAQ 100 or say Japan Equity Markets.
There are around 35 schemes available in India for International Investing. These funds like Indian Funds also have a theme or a country specific diversification. These funds are essentially equity funds and the majority of them are just fund-of-fund or FOF. They act like a vehicle to just collect the funds from Indian Investor and send them abroad to the parent fund to manage.
The main reason you should consider global investments is that by spreading your money among several equity markets, you achieve diversification and hedging risk. This is done by spreading it across a mix of assets and markets.
Individual economies are subject to economic cycles. Look at China for example. Its GDP around 3 years ago was more than 11% but now reduced to 7%. By investing in several economies at a time, your portfolio can earn smoother returns.
In our mutual fund industry, three types of international funds exist:
- those that allow direct investing into global markets
- funds that use the feeder route to invest in an existing global fund
- fund of funds that invest in several funds to achieve international exposure.
Top 20 International Funds India
So, here are the top 20 International Funds arranged as per 5-year performance returns.
The reason why returns in this category can be extremely divergent is the fund objective. For example, there are some funds that invest based on a particular region. Then there are others that invest based on specific themes such as commodity-linked funds, gold-based funds etc. Unlike our funds they cannot be categorized as Large or Mid caps, so comparing them only on returns will be banana vs apple story.
Here is an infographic that caught my eye while researching ion international funds in India.
Like any other equity fund, these funds come with similar risk. But the common thing is these international markets have also proved that “Equity is for Long Term Only.
Another risk is currency risk. The shares or the exchange where international funds invest is in the local currency. So when you invest you pay in INR which is converted to an international currency (Example Singapore Dollar, in case your fund is investing in SGX). So conversion rates will apply.
Now when you are invested, the SGN may go up or down against INR. So net Gain/Loss is:
Funds Gain/Loss PLUS Currency Loss/Gain
This can work in both directions based on the currency performance during your investment period.
Generally, the NAV that we use in India to buy or sell the units is net of currency expenses.
The transaction cost may be more in a particular country. It is a total of brokerages plus custodian cost.
Liquidity Risk: The international markets open and go on holiday as per their country laws. So when there is a holiday abroad the transactions in the fund may not be taken by the mutual fund.
Taxation: International Funds are considered Debt Funds as per India Tax Laws, hence long term capital gain is allowed only when you hold units for 3 years plus. Details Here.
Bottom Line is
Investing in international funds is often a great way to diversify your portfolio and get potentially higher returns. However, for the average investor, navigating the international markets can be a difficult task that can pose a few challenges. By understanding some of the main risks and barriers faced in international markets, an investor can position themselves to minimize these risks.
Hope you liked the infographic and the information? Yes … do share it with your friends.
Do comment or share your experiences with International Funds.