Investing in an International fund – Risk & benefits associated with it

Investing in mutual funds may seem like a lucrative investment option. That’s because as per historical data, till now mutual funds have outperformed every traditional investment avenue that has ever existed in the Indian investment market. Mutual funds offer diversification and active risk management. They have designated fund managers who actively manage the investment portfolio which is why investors without any prior knowledge about markets can invest and earn returns. 

First investors must get themselves acquainted with the different investment opportunities that prevail within the mutual fund umbrella. There are plenty of investment schemes, each entailing a different investment objective, different investment strategies, and different underlying benchmarks which will impact its price to earnings ratio.

Investors who wish to generate long-term wealth by investing in companies like Facebook, Microsoft, Spotify, Apple Inc, etc. which have global recognition can do so by investing in international mutual funds.

What are international funds?

As the name suggests, international funds are those mutual funds that invest in markets across the globe. These funds aim at generating capital appreciation over the long term by investing in equity and debt instruments of companies that are listed outside India.

There are different types of international – 

1. Funds that invest globally including their country of origin
2. Funds that only invest in a specific country
3. Funds which only invest in a specific region eg. Asia, Europe
4. Funds that invest in a particular sector or theme, eg. Crude oil, pharma, gold mining, etc.
5. Funds that directly invest in international securities and have a fund manager who actively manages the portfolio
6. Fund of funds which invest in foreign fund/s that are managed by an offshore AMC

Benefits of investing in international funds

The biggest advantage of investing in an international fund is obvious, they allow investors to gain exposure to markets beyond geographical boundaries. A lot of Indian investors are already giving business to global companies like Facebook, Apple, Microsoft, Amazon, etc. by buying their products and services. These investors can now invest in such companies listed outside India and benefit from their booming business. Since the fund majorly invests in international markets its portfolio is less likely to get affected by fluctuations in the domestic market cycles. Investors get access to international markets by investing in a feeder fund. They do not need to set up any separate demat or investment account to invest in foreign securities. 

What are some of the risks associated with international funds?

Just because the investment portfolio of an international fund may not get affected by fluctuations in the local market doesn’t mean that these funds are entirely risk-free. Investors should be aware of the political and economic developments about the countries in which the international fund will invest. There’s currency risk involved too. If the currency value of the country in which your fund depreciates, its NAV will fall and may impact the fund’s overall performance. If the Indian rupee’s value rises against the currency value of the international fund in which you have invested, it might not be a good sign for your investments.

To allow your international fund investments to benefit across market cycles, investors can consider opting for a Systematic Investment Plan (SIP). SIPs give mutual fund investors much-needed flexibility. Investors can decide how much money to invest at regular intervals and they can also use the SIP calculator to determine the overall returns at the end of their investment journey. 

International mutual funds may seem like a lucrative option for building a long term corpus, but investors should talk to their financial advisor before investing.