Mutual fund investors are always looking for schemes that may align with their investment goals and help with the much-needed diversification. Investors these days can offer their investment portfolio with global diversification, thanks to the introduction of international funds.
International funds are one of the most sought-after mutual fund schemes by investors seeking international diversification to their domestic heavy portfolio. It is now possible for retail investors to invest their money overseas through a domestic mutual fund. Investors seeking exposure to foreign markets and seeking returns by investing across market cycles can consider investing in international funds.
What is an international mutual fund?
International mutual funds offer retail investors the opportunity to create wealth by investing in markets prevailing outside their home country. An international mutual fund constructs its portfolio based on international securities by investing in foreign currencies, international markets, and in equity and debt instruments of foreign companies listed outside India.
The best part about international funds is that they can deliver even when the domestic markets are volatile. That’s because international funds do not invest in domestic markets, they only focus on offshore securities. So even if a certain pandemic or political/economical unrest causes a direct negative impact on domestic markets, your international funds may continue to deliver.
Since these funds invest a diversified based of securities, they avert concentration risk.
International funds which invest in domestic as well as international markets are referred to as global funds. International funds may directly invest in foreign securities or collect money from investors and transfer it to a fund that is managed offshore. Some of them are thematic funds that invest a specific theme whereas international FOFs invest in one of the multiple foreign funds rather than actively buying and managing a foreign portfolio.
How to choose the right type of international fund?
Before investing in any mutual fund scheme, be it an international fund or a fund that invests in domestic markets, the first question which new investors should be asking themselves is “What are my financial goals?” Once they can have a clear perspective on what their goals are, the next step involves determining how many years they have in hand to achieve those goals. The final step is to understand their risk tolerance so that they do end up investing in schemes that are beyond their risk appetite.
A lot of people only invest in international funds because these funds invest in global giants like Facebook, Apple, Microsoft, Spotify, etc. Although one will get good exposure to such companies that aren’t listed in India, investors need to ensure that their investment objective aligns with the international fund they are about to invest in.
There are various types of international funds as mentioned earlier, some invest only in one country, some invest across developed nations, some choose to invest in a specific theme or sector. What kind of diversification are you looking for? What kind of exposure are you seeking? If you have answers to these basic questions, making an investment decision may not seem that difficult. Investors should understand that investing in an international fund that only invests in one country may not offer true diversification. Hence, they can consider investing in a scheme that invests in more than one country to avoid concentration risk. Those who are determinant of investing in a particular sector or theme like pharma, crude oil, etc. may consider investing in a thematic international fund.
New investors who aren’t able to make an investment decision can seek professional consultation by talking to a mutual fund expert or a financial advisor.