Are International Mutual Funds Suitable for All?

January 09 , 2013

International mutual funds were introduced in India five years ago but the last two years have seen a spurt in mutual funds launching these exotic products. Majority of the global funds from India are focused on either commodities or emerging economies as theme.

Some experts are of the view that international funds can make a good addition to one's investment portfolio. Let us examine if this is really the case.

How international funds are useful

International funds invest in securities of foreign countries. Some of them invest directly by buying the securities themselves from international stock exchanges; others are fund of funds that simply invest in mutual funds or ETFs investing in international securities.

Market dynamics are different in different countries. International funds capitalize on this fact. If Indian markets did not do well in a certain period you could still have made some returns if you were invested in some other economy that did. Another fact is that certain locations have unique opportunities due to presence of certain natural resources or some other advantage. Through international funds you can benefit from them. Movement of currency value can generate returns (but also work damagingly). International mutual funds can capture this benefit.

Most of the benefits listed above can be realized only when the scale of investment is large. But let us first look at the bottom line of these mutual funds.

Performance of international funds

Based on returns of international funds by, these funds have not performed better than diversified equity funds. While the average one year return of diversified equity funds have been about 31% in January 2013 most international funds have had lower returns for the same period and certain funds clocked negative returns. Overall we found that majority of the underlying funds (in case of international funds that are fund of funds) were rated poorly by international mutual fund rating agencies.

Will international mutual funds make sense in your portfolio?

Gone are the days when we were mesmerized by anything 'foreign'. Despite all the benefits, we believe international mutual funds are not suited for small, salaried investors in India. This is for the following reasons

1. Emerging markets story is not glamorous for investors belonging to an emerging economy. Since India is an emerging economy investors do not need to 'look east' or 'look west' for opportunities to maximize returns.

2.  Fund management fees charged by international funds are higher since most of them are fund of funds. Expenses are charged at each level of funds. For the kind of returns expected from these funds, it is not worth paying additional fees.

3. Global funds are exotic products for small investors. You can be successful in an investment if you understand the mechanics. This is not the case in global funds. Fund managers themselves do not actively manage global funds, instead they rely on the abilities of fund managers of the underlying funds, probably sitting in another part of the world.

However for HNIs and other big investors the story is different. Since they invest huge amounts, diversification to other markets may be very important to them. They are stressed about the political and investment scenario in the country and are looking for ways to expose part of their portfolio to different markets. For them investing in global mutual funds is not so much about earning a few percentage returns points over what can be had in India and for these category of investors international mutual funds could be a rewarding investment choice.

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