Investing in International Funds
These days, investing in international markets is what is catching the fancy of investors. And this can well be attributed to the returns that international funds have generated in recent times. If we look at the average one-year trailing returns of international funds, they make an impressive cut with around 52 per cent on an average. Further, on a trailing one-year basis, the highest return generated by international funds is 108 per cent and the lowest return is 5 per cent, as per RupeeVest. Here we have also assumed fund of funds (FoF) overseas. Therefore, wherever we have stated international funds, it includes FoF overseas.
The above graph clearly shows that international funds have been giving good returns in the last couple of years. Also, the returns generated in the years 2019 and 2020 are the highest average calendar year returns that this category has generated in the past 10 years. No wonder why most of the mutual fund advisors are recommending them. Making investments based on the recent returns would make you surrender to the recency bias. Rather, it is more prudent to take a holistic view before committing to any fund. The following paragraphs provide insights into what international mutual funds mean, their different types, and whether you should invest in them now.
Defining International Funds
International funds are mutual fund schemes that seek to invest in securities of foreign companies that are listed in the foreign markets. The structure of international funds can be broadly of three types. These funds could directly invest in global markets or they can even use a feeder route to invest in an existing global fund or can adopt a FoF approach by investing in several funds in order to achieve international exposure. Having said that, they function similar to domestic mutual funds wherein you invest in rupees, units are allocated to you, and their net asset value (NAV) is available to figure out their performance.
As of February 2021, the assets under management (AUM) of international funds has been hovering around Rs 15,871 crore across 45 schemes, which might seem to be insignificant compared to the mutual fund industry AUM of Rs 31,64,114 crore. However, since its debut in the Indian mutual fund space, international funds have steadily increased their presence in individual portfolios. This is a natural extension to what we believe – diversify your investments across various assets and geographies. Investing in international funds allows you to diversify across different economies and currencies. It also offers investors a share in the potential growth of foreign companies. And, you get this while you reside in India.Moreover, there is one misconception about international funds that they invest only in US’ stocks. However, this is not necessary. When it comes to international funds, they invest anywhere other than the domestic country. In fact, they can even take exposure to countries like Bhutan, Nepal or Sri Lanka if there are visible opportunities. Therefore, international funds invest globally and are not restricted to any specific region. There are in total 45 international funds that have a different approach towards global investing. This can be anything such as investing in companies of specific or different regions, countries and themes.
Thematic International Funds :These funds, most of the times, invest in a specific theme and are sort of concentrated in nature. As for example, the DSP World Mining Fund invests in companies such as Rio Tinto Plc, BHP Group Plc and Barrick Gold Corporation which are specifically into mining. Similarly, Aditya Birla Sun Life Global Real Estate Fund invests in companies operating in the real estate space globally.
Geography-Specific International Funds : As the name suggests, these funds tend to diversify geographically into different countries and regions. Here the objective of these schemes is to primarily discover opportunities in different regions and countries. For instance, Edelweiss Greater China Equity Off-Shore Fund primarily invests in a diversified portfolio of companies that are domiciled in or carrying out the main part of their economic activity in Greater China region. Motilal Oswal Nasdaq 100 FOF and Motilal Oswal NASDAQ 100 Exchange Traded Fund (ETF) invest in the NASDAQ 100 index, which includes 100 of the largest and listed non-financial companies based on market capitalisation in the US.
Presence in Global Markets : These kind of international funds broadly diversify their assets across the globe. For example, ICICI Prudential Global Stable Equity Fund (FOF) invests globally. Even Sundaram Global Brand Fund is one such fund that invests in companies across the world with no geographical barriers.
Investment Benefits
When you invest in international funds, apart from diversification and risk hedging, these funds give exposure to different economic cycles. This means spreading your investments across economies, which can potentially help you earn smooth returns.
International Access : Globalisation impacts every aspect of our lives. We use products and services of companies that are not headquartered in India or of companies not listed on the Indian bourses. For instance, we use the products and services of Google, Amazon, Facebook and Reebok, among others, in our day-to-day life. With Indian investors being able to experience the products and services of such companies, international funds give investors an opportunity to also invest in them. Investing in global companies benefits you from a global presence and spread. The growth prospects of such companies are not restricted to a single country, and by investing in them you can participate in the gains that these companies make across the globe.
Movement of World Markets : If you look at the performance of global indices over time, it becomes apparent that world markets do not have a strong correlation. In fact, over time and different market cycles, even a domestic index rarely retains top performance. The same applies to funds that invest in the domestic market. It is for this very reason that it is always prudent to have a well-diversified mutual fund portfolio. In order to understand this, we have analysed the performance of six indices across the US, Japan, Hong Kong, UK, India and Korea. The period of analysis is from 2011 to 2020 and it appears that none of the market indices managed to retain the top spot for two successive years. (See table: Performance of Global Equity Markets).
This indicates how different regional markets perform differently based on the local as well as global events. The pandemic, in particular, impacted all the global markets in the year 2020. However, if we look at the performance of equity indices of each country, there were different levels of falls. Thus, if you had invested equally across these six different indices representing their respective geographies, such a portfolio would have had less impact than having a country-specific
Risk Factors in International Fund Investments
Though the upside of investing internationally is well-advocated, yet, at the same time one should be aware of the risk factors too. No investment is risk-free. Listed below are a few of the pertinent risk elements while investing in international funds that you should know.
1) Expense Ratio : While investing in international funds where most of them are FoFs, one should understand the fact that you end up paying fund management cost at least twice. One part goes to the Indian asset management company (AMC) managing the fund here and the other goes to the scheme(s) in which the fund is eventually investing. Though the expense ratio is within its applicable range in India, brokerage and fund management charges in the foreign fund will also be applicable. This is something which might be difficult for you to get details of but it definitely reduces your returns.
2) Economic and Political Risk: When you invest in other countries, there are economic and political risks that are specific to those countries where you have exposure. Therefore, it is important to track key information and developments, which is not easily accessible to every investor. Even the liquidity in international funds can be another such factor that needs to be considered, especially in schemes that invest in a specific theme.
3) Currency Volatility : Though the advantage of a stronger dollar against the rupee is evident, you need to factor the possibility of some currencies falling against the rupee. This is because the funds you invest in may convert the rupee into different currencies depending on the type of fund you invest in. Hence, any sort of currency fluctuations could impact the gains you may have made in such funds. However, you as an investor may hardly sense the impact of currency exchange rates because your investments are in rupees and you view the performance of the fund in the same currency. The currency exchange fluctuations do work in the background, which kick off as the investment undergoes multiple currency conversion and losses on exchange rates along with applicable charges.
portfolio. For instance, in 2019, the average return from these six indices works out to 14.44 per cent, which is less compared to the Dow Jones Industrial Average (DJIA), which was the top performer in the year 2019.
Likewise, in the year 2018, when the global markets were drowning, the diversified portfolio would have been down by 9.55 per cent, which somewhat cushions the volatility in returns across the markets when the global markets were posting double-digit negative returns. This in turn suggests the advantage of having a diversified portfolio that is spread across different geographies. Such a diversification is beneficial to your overall portfolio just the way it is by diversifying across sectors and market-caps when investing in India.
Low Correlation :In investing, a low correlation means that different asset types did not perform in the same way and hence investing in low correlation assets gives you the benefit of diversification. This becomes useful while investing globally because when the performance of investments in a particular country declines, there are geographies that perform and help your portfolio to sustain its performance. In order to understand correlation between the markets, we analysed the monthly returns data of the same six global indices covered in the table above. The period of study spanned between the years 2000 to 2020.
The above table clearly shows that there is low correlation between the global indices. Any number between 0.8 and 1.0 is considered to be highly correlated and any number below 0.8 depicts not such a strong correlation. Only FTSE and DJIA have correlation of 0.8, which indicates high correlation. Having said that, do not confuse low correlation with negative correlation and high correlation with positive correlation. Negative correlation is when the market returns move in an opposite direction and on the other hand, positive correlation implies markets moving in the same direction.
For example, let us look at the year 2008 when the markets were affected by a global financial market crash. Here the S & P BSE Sensex plunged by 52 per cent while the DJIA dropped by 34 per cent but Hang Seng fell by 42 per cent. Likewise, even in 2011, S & P BSE Sensex had a fall close to 25 per cent whereas DJIA gained 5 per cent but Hang Seng fell by 18 per cent. Therefore, from this data it seems that there is a low correlation between S & P BSE Sensex and DIJA but high correlation between S & P BSE Sensex and Hang Seng.
Aptitude for International Funds
The article would have made it clear that given the risks, not all investors would like to invest in international funds. In short, it is not everyone’s cup of tea and would primarily depend on what the purpose of your investment is. Therefore, international funds would be more suitable for investors seeking wealth creation and looking to further diversify their portfolio. Even those investors who might be planning for their child’s education abroad should have exposure to international funds and specifically to those international funds that have country-specific exposure where your child plans to study.
Also, people with international vacation goals can have exposure to international funds. However, apart from these investors, all other investors should avoid investing in international funds as the exercise might not serve the purpose. Investors in international funds should also keep in mind that investing in international funds makes sense if your investment horizon is not less than five to seven years. Moreover, investing in a staggered manner via a systematic investment plan (SIP) would be an ideal way of gaining exposure to international funds.
"The secret to global investing is gaining an insight into the hopes and desires of the people who live and work in the countries you invest in."
Mark Mobius