International funds have been making headlines lately for topping the return charts. Thanks to the improved economic environment of their economies, funds focused on the US, China, Japan and Brazil have performed well in the last year.
Before delving to the suitability of international funds for Indian investors, let's look at what these funds are.
An international fund is a mutual fund that invests in shares of companies from other countries. They could be structured in one of the three ways:
1. Funds that invest directly in companies from other countries.
2. Funds that invest in funds of other countries i.e. pool investments from investors which are then transferred to a foreign fund managed by an offshore fund manager.
3. Funds that invest in a combination of domestic and foreign companies in such a way that they retain their domestic status from the taxation point of view.
Types of International funds
Further, international funds may be classified based on their geographical area of investment or on themes such as energy, gold mining, and so on.
1. Region specific funds - Example- Franklin India Feeder US Opportunities Fund
2. Funds with no geographical mandate - Example- Aditya Birla Sun Life International Equity Fund
3. Thematic funds - Example- DSPBR World Mining Fund
Risks involved in investing in International funds
Performance of international funds depends upon the performance of the invested companies andthe market to which the company belongs.Market performance can depend upon the political, social and economic environment of the country.
Currency movements too have a great impact on the performance of international funds. For example, if the rupee depreciates against the dollar, then a US based international fund would gain as you would get more rupees per dollar invested.
Thus, macro factors play an important role in determining the performance of international funds, which make these funds more volatile as compared to well diversified Indian mutual funds.
Suitability of International funds
If all the macro factors stated above are in your favour,then there are benefits to investment in International funds.They can add to portfolio diversification, offer the potential of earning higher returns and the opportunity to participate in the growth story of global companies.
However, investments in International funds require continuous research and it is difficult for individual investors to gauge currency and global market movements. Moreover, it is difficult to predict the economic cycle of any country which in turn is the decisive factor in getting maximum returns with minimum risk from any International fund.
Therefore, we believe investments in these funds should be done considering one's investment horizon, risk profile and portfolio diversification, apart from the prevailing economic scenario in the country.
After providing for priority financial goals, one can consider taking exposure to such funds up to 5-7% of the investible surplus. The economic cycle/current scenario of the invested country plays an important role in deciding how long your investments should remain in the fund.
Chitra Iyer is the CEO of My Financial Advisor.