January 10 , 2013
International mutual funds have caught the fancy of quite a few investors. International mutual funds directly or indirectly invest money collected from investors in equities of foreign companies. Some people like to distinguish between international funds and global funds. They prefer to call funds that invest in companies located in countries other than the investors' country as international mutual funds and those funds investing in companies located in the investors' country as well as others as global funds. But we don't mind using the terms interchangeably.
Where do international funds invest?
Majority of the international/global funds from India are fund of funds. A fund of funds is one that invests in other mutual funds and ETFs. Examples of these are Principal Global Opportunities, Kotak Global Emerging Market, Sundaram Global Advantage. These invest in global indices like MSCI's or in mutual funds and ETFs of other countries managed by foreign fund houses.
There are a few global funds that directly invest in international equities, ADRs and GDRs. Examples are Mirae Asset Global Commodity Stocks, Reliance US Equity Opportunity, ICICI Prudential US Bluechip Equity.
A good number of international funds are thematic or sectoral in nature. There are global funds from India with focus on sectors like energy, gold and infrastructure. Except for gold funds, most of the commodity funds from India are in fact international funds.
Benefits of international mutual funds
Most of the benefits cited by mutual fund houses that have launched international funds can be classified under these:
1. International mutual funds capitalize on opportunities in emerging markets
Global funds are very popular in developed economies whose equity markets return at lower rate compared to equity markets of emerging economies like ours. Emerging economies like India, China, Russia, Brazil are in the rapid growth phase and investors in other economies can take part in their growth story by placing some of their funds in these countries via mutual funds. For such investors these funds serve to capitalize on opportunities in global markets.
2. International mutual funds offer diversification
The second objective served is diversification of investment portfolio. Although the entire world economy today is interlinked due to global trade, the differences in political, geographical and technological conditions lead to wide variations in performances of different economies. Investing in markets scattered across the globe would minimize risk of losing capital in a downfall as rarely do markets collapse simultaneously. For instance immediately following the global financial crisis of 2008, equity market in India saw a rush of inflow of foreign money from institutional investors in developed countries. Not only is diversification a way of spreading risks it can also offer a way to reach out where unique opportunities exist.
3. International mutual funds benefit from currency movement
Even for economies that are working in the same frequency in the sense that their economic cycles are more or less in the same tune (in technical parlance have high correlation) difference in exchange rate can work out gains for investors. For instance imagine that Australian market gave similar returns in the last year as the Indian market. If the Rupee did poorly as compared to Australian Dollars you would have still made returns from a global fund investing in Australian market.
But remember that this is a double-edged sword. It can deprive you of whatever returns you made if the Rupee did well or even turn your returns negative.
Who should invest in global funds?
For average, salaried investors having an international mutual fund is unnecessary. Given that you belong to one of the emerging markets the world is looking expectantly at, returns from these international funds are not expected to beat what you can make through domestic funds. This is supported by analysis of past returns from international funds from India.