The Benefits and Risk of Investing in International Mutual Funds

Investors are on a constant lookout for diversification opportunities in their investment portfolios through investing in different asset classes. Within the gamut of equity investing, many investors want to traverse the geographical country boundaries and invest internationally. International Mutual Funds offer them such an opportunity.

What are International Mutual Funds?

As the name suggests, an international mutual fund, or ETF, invests in companies in foreign countries or outside the investor’s country of origin. Hence, these funds are also called Foreign Mutual Funds or Overseas Funds. Investors want to explore international markets and tap into their earning potential. Hence, many international funds have been launched with different portfolio compositions and structures.

 Types of International Funds

There are a host of international funds available in India for investors to invest in. Each of these funds takes a different approach to global investing.

• Thematic International Funds: These are like domestic thematic mutual funds wherein the fund follows a theme-based investing approach. Similarly, an international thematic fund will invest in the stocks of foreign companies that belong to the concerned theme.
• Region or Country-Specific Funds: As the name suggests, regional funds invest in companies from a specific geographical region anywhere in the world. The main motive is to capitalize on the opportunities generated by these markets to reap good returns.
• Global Markets: They are contrary to the region or country-specific funds. Instead of catering to a specific country or particular region, these funds invest globally. They have a portfolio consisting of stocks of companies from across the world. Even if one of the markets does not perform well, investments in other markets would save the day for the investor as the main aim here is diversification.

Advantages of International Funds

• Geographical Diversification: There are many advantages to investing in international funds. However, diversification is the biggest advantage offered by international funds. International funds help you leverage the opportunities in these markets, while the Indian economy cannot generate good returns for you. Thus, if you spread out your investment across geographies, you’ll get diversification on a global scale.
• Access to the International Market: any international companies that you know are global leaders in the services or products they offer, like Google, Apple, Facebook, 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 the MF route.

Who Should Invest in International Funds?

1. Equity Investors with a Well-Diversified Domestic Portfolio
2. Looking to Invest in Global Market Leaders
3. Looking to Leverage Opportunities in Different Markets
4. Investors with a Long-Term Horizon

Key Risks Associated with International Mutual Funds

• Economic & Political Risk: As international funds invest in other countries or regions, the changes in the economic or political conditions there can negatively impact your investment in international funds.
• Currency Risk: When you invest in international funds, you get exposure to a foreign currency. Any depreciation in the value of the foreign currency or any appreciation in the home currency will decrease your returns.

Things to keep in mind before investing

Now you have gained optimal clarity on what are international funds, the types of international funds, and the advantages of international funds. Here are some things you should keep in mind, before deciding to park your corpus in the various types of international funds

• Firstly, understanding the foreign markets is crucial as each country comes with its economic, political, and regulatory dynamics that can significantly impact investment returns. Conduct thorough research on the countries in which the fund invests to assess their stability, growth prospects, and potential risks.

• Additionally, the fund’s strategy and approach must align with your investment goals. Some international funds focus on specific regions or sectors, while others offer broader global exposure. Evaluate the fund’s holdings, allocation, and historical performance to ensure it matches your risk tolerance and objectives.

Finally, tax implications also warrant attention so decode how foreign dividends and capital gains will be taxed in your home country to accurately gauge the impact on your returns.