Today traveling to a foreign country is no more a “lucky chance”. In earlier days people use to show horoscopes to learned men and wanted to know if they have “videsh yatra yog” (destiny to fly abroad). But today we see lakhs of Indians crossing the border for work, education & pleasure. So what about investments? Can they cross borders? Yes through International Funds you may choose to invest in foreign companies, countries & zones. So here is how investing in International funds can be done.
Investing is international funds like any other investment contains risk & return probability. I will offer you details here. But I would suggest checking your risk appetite, asset allocation & horizon to decide in investing in international funds.
The primary reason for investing in international funds is Diversification. Our economy will be different to other countries economy. One tries to benefit from this difference.
The second important reason is Hedging. Through hedging you try to build a different portfolio so that in times when your main portfolio is facing bad time, the international portfolio minimize or hedge the losses. This is a professional job if you look at in details.
We have already provided the details on “How to invest in International Funds”. Here we talk about the reasons and factors impacting investing in international funds.
Let’s see the Pros & Cons of Investing in International Funds
The Benefits
Diversification
Worldwide diversification can be used to reduce risk. This strategy is widely used by international fund managers like Sir John Templeton or George Soros. These iconic investors & fund investor have used risk management strategy of combining a wide variety of investment to reduce the overall risk.
The aim is to beat the downtrend in a home market by making gains in the other international markets. You can do it too. You or your advisor can identify these opportunities using mutual fund route.
Taking advantage of World’s Best Companies
Many international companies that you know are global leaders in the services or products they offer. Netflix, Amazon, Apple, Google, Berkshire, Facebook , Microsoft, Exxon Mobile etc. do not have their stocks listed on the Indian stock exchanges. If an investor wants to participate in the growth of these stocks, he can do so by investing in international funds through MF route.
Protecting the core portfolio
An International fund can be used as a hedge. Not only in returns but in situations of currency fluctuations like fall in the rupee against dollar. Many times investor may feel a strong local weak against Dollars or Euros. Investing in the international fund can help in investing thus minimizing loss owing to the currency depreciation.
Investing in Legendary Funds
There are many funds which act as a feeder fund for an international fund. They collect money and invest in the main fund which is international. Majority of these international mutual funds scheme have a commendable reputation. You can be a part of these funds. Eg Franklin Feeder Fund invests in Franklin’s main fund called Franklin US Opportunities Fund. Take a look at the portfolio.
It’s not limited to US or UK. Global Opportunities are available
You name a good country or economic zone, you can find an international fund to invest. An Investors has a wide variety of schemes like Hongkong, Japan, China, Aisa, Brazil or Commodities. The investor can choose region specific schemes or scheme based on the particular zone (like Europe) or based on commodities like gold or agriculture.
The 4 most important risks of Investing in International Funds
Know-how of a foreign economy
You are 1000s km and you have very less knowledge about economic changes. Let’s take an example.
You have invested in Indian Fund based on consumption and a Brazilian fund. Even the non-business newspaper told you a couple of days ago that monsoon will be 97%. But what about Brazil? Can you track such information?
So this risk can be reduced by using an advisor keeping a track of international funds. Also when you invest through MFs the fund manager takes care of these information and makes changes accordingly if he is allowed by management.
Currency Risk
Investing in international funds faces major drawback called the currency volatility. Your investment is made in rupees, which is then changed to a different currency, depending on the country in which it is invested. Now if the foreign currency in which you have invested falls in value against the rupee, your profits will be eroded to extent of fall . Hence the gains you may have made through investments will be reduced.
So in a way, it like praying “rupee should not become stronger” against the currency in which you have invested.
Increasing Political Risks
Just look around and note the events.
On one hand, Trump is facing a probable impeachment but he chooses to fire 100 plus missile in a Russia protected country.
Xi Jinping just acquired a sort of “emperor for life” status in China.
Emanual Macron in France is facing what Kejriwal is facing in Delhi.
Nawaz Shariff banned to contest elections. Who will take over legacy? Son, Daughter, Brother, Nephew? Will he be a friend to India or same story will repeat?
When you are in business with these countries, politics is what you get without asking. Deciphering politics? Well, world’s major universities are trying to learn it until today.
Taxation of International funds
This is a real dampener. Funds that invest in stocks abroad do not carry the advantage of equity investing. These are taxed as a debt fund. If you hold them for over three years, long-term capital gains tax at the rate of 20% (with the inflation indexation benefit) is applicable. For a holding period of less than 3 years, you’ll have to pay a short-term capital gains tax as per the income tax slab system.
Share your views on investing in international funds through MF route. Would you like to invest directly in these countries or economies? Do share the article with your family & friends.
