International Mutual Fund: The Investment Avenue For Brave Investors

International Mutual Fund: The Investment Avenue For Brave Investors 

Investing internationally via mutual funds sounds like a lucrative idea. Karan Bhojwani surfs through all the funds in the category to get a detailed perspective

Anand Rai, a senior official in his mid-thirties, is working with an MNC organisation. All through the years, he has been a disciplined saver and dominant part of his savingRobert G. Allen, the renowned financial
author and adviser, has been quoted as
saying “How many millionaires do you
know who have become wealthy by
investing in savings accounts? I rest my
case.” The recent cut in savings bank rate
and downward revision in interest rates
on fixed deposits have further dented
Rai's sentiments to continue with fixeds was invested in fixed deposits, savings account and tax free bonds. Now, Anand Rai wants to start planning for his child’s higher education. However, Rai is not happy with the returns he has fetched on his savings account and fixed deposits and he is quite certain if he continues with these investment routes, he will not be able to create the desired corpus of fund required for his child’s education.  

Robert G. Allen, the renowned financial author and adviser, has been quoted as saying “How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” The recent cut in savings bank rate and downward revision in interest rates on fixed deposits have further dented Rai's sentiments to continue with fixed deposits and saving accounts. On the other hand, over a period of last 3-5 years, mutual funds have delivered good returns. Hence, Rai is seeking advice from his financial adviser for investment in mutual funds to achieve the desired corpus for his child’s education.

To start with, the financial adviser asked Rai about his goals, and after speaking to him for a while, a critical thing that featured in the conversation with Rai was that he has the desire to send his child to a foreign country for higher education. So considering this point, the financial consultant suggested having some per cent of his saving invested in international mutual funds. 

Now, why did Rai’s financial adviser propose him to have some percentage of his savings invested in international mutual funds? Firstly, international investments may be helpful for Rai as he is looking to fund his child's foreign education. Since Rai's earnings are in Indian rupees, he will have to exchange them for dollars whenever he needs the money for the purpose of his child's foreign education in future. 

Deploying savings in a mutual fund that holds international assets implies that the returns to him as an investor are in US dollars. Furthermore, the financial adviser wants him to invest in companies spread over other geographies so that just in case his Indian investments fail to deliver desired returns due to some domestic issues, his international investments may still deliver stable returns. This would also serve the purpose of geographical diversification of his investments. 

WHAT IS AN INTERNATIONAL FUND? 

As per the definition of Investopedia, international mutual fund is “a mutual fund that can invest in companies located anywhere outside of its investors’ country of residence.” In simple terms, international mutual funds invest in stocks and shares of companies outside the investors' home country. In the case of an Indian investor, an international mutual fund would be a fund that invests in the equities of companies that are outside India. Many individuals often get confused between the term international fund and global fund. The difference between the global fund and international fund is that global fund includes entire world, while an international fund includes the entire world, excluding the investor’s home country.

WHY SHOULD ONE GO FOR INTERNATIONAL MUTUAL FUNDS? 

When it comes to investing, the age-old adage is: “Don’t put all your eggs in one basket”. Investing in international mutual funds helps serve the purpose of diversification. International funds invest in shares and stocks of companies outside the investor’s home country, giving excellent portfolio diversification and hedging risk by spreading it over a blend of geographies and markets and allowing the investors' to capitalise on some of the world’s best opportunities. 

TYPES OF INTERNATIONAL MUTUAL FUNDS: 

International mutual funds come in three types:  

Domestic-International Hybrid: The domestic-international hybrid fund invests 65 per cent plus money in domestic equities and the balance around 35 per cent in international markets. In the case of the Indian investors, this is a good option because Indian markets are doing rather well presently and the road map for future looks good. Additionally, as under taxation, long term capital gains tax is zero, returns from these investments become tax-free after one year. 

Feeder Investments: These funds invest through “feeder” route into a particular country or region. Under this mechanism, the fund invests in another international fund, which in turn invests directly in foreign stocks.

Thematic Investments: These funds invest in stocks with an underlying theme based on sector and industry.

FINAL SAY : To sum up, international mutual funds will help an investor to diversify portfolio across different economies in the world. Additionally, these funds open up doors to some good investment opportunities that are not available in India. However, to make a wise decision, an investor should do detailed research about the international markets in which they plan to include in their investment portfolio. More importantly, investors should be mindful of risks associated with these funds, i.e. currency risks and geopolitical risks. Investors who are looking for diversification can take small exposure to the International mutual funds; may be 5-10 per cent of the mutual fund portion of their total investment portfolio.

Tejas Khoday Co-founder & CEO, FYERS

''International diversification in equities can be especially fruitful during times of distress in India. Ideally, it is best pursued when the equity markets are declining and the currency is losing its value. It helps to mitigate the depreciation of the Indian rupee. To give you an idea, in just the last five years, INR has lost 16% of its value against the US dollar. In layman’s terms, this means that the purchasing power of Indians has deteriorated by almost one fifth. The highest benefits of international investing can be achieved when the Indian rupee depreciates and the foreign equity investments appreciate simultaneously''

Dinesh Rohira Founder & CEO, 5nance.

''As mutual fund industry in India is growing at quantum pace, investors are catching hold of international mutual fund as an element to build a defensive portfolio. Like any mutual fund that invests in domestic market, international funds are aimed at investing only in foreign territory. Like India, many other emerging and developed markets are in growth phase with increasing economic activities, coupled with higher corporate earnings. Thus, these markets provide a great opportunity for domestic investors to earn higher returns and, at the same time, diversify their overall portfolio.''

❝The biggest advantage of investing in international funds is diversification❞
Kaustubh Belapurkar, , Director Fund Research, Morningstar India

What Are risk associated with investing in international mutual funds? 

One of the risks associated with investing in international funds is currency risk. If rupee strengthens, then it erodes your returns vis-à-vis a pure domestic investment. Also, if you are investing into country or region-specific funds, then you could be exposed to specific country/geopolitical risks. 

Another aspect, though not a risk, is the unfavourable tax treatment for international equity funds. Although these are equity funds, for tax purposes they are classified as non-equity, thus investors end up paying a capital gains tax which is higher compared to domestic equity funds.

What are the advantages of investing in international mutual funds? 

The biggest advantage of investing in international funds is diversification benefits. By adding international funds to your portfolio, you can reduce the overall volatility of your portfolio by as much as 5-10%. The primary reason for this is the co-relation of the domestic markets is lower with international markets, especially with that of developed markets. 

Another advantage is ability to take exposure to sectors or companies that you would ordinarily not have exposure to. Global companies like Amazon, Google, Facebook, Coca Cola, etc. are widely known and used brands in India; they derive a fair share of the revenues/users from countries such as ours. By investing in these funds, you can potentially gain exposure to such stocks. 

What parameters should one take into consideration before investing in international mutual funds? 

There are a few things to consider while taking international fund exposure. Firstly, each investor needs to understand their risk and return requirements, basis their investment objectives and time horizon. Once these have been arrived at, an efficient portfolio is constructed, which decides the level of international fund allocations. The next decision would involve choosing the types of international exposure – country specific, regional, emerging markets, developed markets, etc. Most investors would be better-served taking exposure to developed markets funds or funds investing into the US or Europe, which are more broad-based.

How has been the participation from individual investors when it comes to investing in these Indian rupee denominated international mutual funds? 

International funds from an Indian investor’s perspective have been a little bit of a hit-and-miss. Global fund investment options, albeit limited, have been around for a decade, with options to invest into the US, Europe, ASEAN, country-specific funds like Brazil and China and even funds investing into natural resources companies like gold mining companies or energy companies. The greatest amount of investor interest has typically been in gold mining funds and the US funds. In fact, in 2013, when the Indian equity markets were going through a prolonged lull phase, domestic equity funds too were witnessing stagnating growth. At the time, investors increased allocation into the US funds on the back of strong one year historical returns of these funds. Post that, though the story has been very different, with the start of the domestic equity market rally in 2014, domestic fund flows are reaching new highs, but global funds are witnessing a slow trickle of redemptions. As an effect of this, global funds currently form a minuscule proportion of investor’s equity portfolio at 0.27% from a high of 1.56% in Jan 2014. 

How have these international mutual funds performed vis-a-vis Indian mutual funds? 

Since the global funds available are quite diverse, we have compared the returns of some of the popular global indices with the Nifty. This gives you an idea that no one index/country can consistently outperform year-on-year. In fact, the returns can be quite divergent.

How many such funds are available for investing in India and what is the size of total assets managed by such funds or FoFs? 

There are ~35 international funds that are available for Indian investors. The AUM of international funds has been dipping over the years and this is even more exaggerated when comparing the share of global funds as a % of overall equity fund AUMs.

PROS OF INVESTING IN INTERNATIONAL FUNDS: 

1. Diversification: “In my 45-year career as an investment counsellor, humility did show me the need for worldwide diversification to reduce risk. That career did help me to become more and more humble because statistics showed that when I advised a client to buy one stock to replace another, about one-third of the time the client would have done better to ignore my advice. In other endeavours, humility about how little I know has encouraged me to listen more carefully and more wisely,“ said Sir John Templeton, the iconic investor, fund manager and philanthropist. In finance and investment planning, diversification is the risk management strategy of combining wide variety of investments to reduce the overall risk of an investment portfolio. Not all the markets of the world move in tandem, so a downtrend in a home market can be well taken care of by gains in the other international markets. 

2. Lets you capitalize on some of world’s best opportunities: Many international companies that are fundamentally strong and are global leaders in the services or products they offer like Amazon, Google, Facebook, Microsoft, etc. do not have their stocks listed on the Indian stock exchanges. In such cases, if any investor wants to participate in the growth stories of these stocks, he/she can do so by investing in international mutual funds. 

3. Acts as hedge: An international fund acts as a hedge against the fall in the rupee against dollar, thus minimising loss owing to the currency depreciation. 

4. Sufficient track records: Majority of the international mutual fund schemes have commendable reputation and provide adequate data on their past performance. All of this information empowers the investors to take a sound and informed decision. 

5. Availability of wide variety of schemes: An investor has wide variety of schemes at his/her disposal. The investor can choose region-specific schemes or schemes based on particular theme. 

CONS OF INVESTING IN INTERNATIONAL FUNDS: 

1. Slowdown in foreign economies: The Indian economy is a bright spot for investment and it is one of the prominent economies among all emerging markets, investments made in the Indian markets have delivered hefty returns, while international economies are facing slowdown and some economies have reached stagnation point. In such a scenario, investing in low growth foreign funds instead of investing in the prominent economies of the emerging markets needs a careful consideration. 

2. Currency Risk: One of the significant drawbacks of investing in international mutual funds is the currency volatility. While investing in an international fund, the investment is made in rupees, which is then changed over into different currencies, depending on the country in which it is invested. If the foreign currency in which you have invested falls in value against the rupee, your profits will be eroded and the gains you may have made through investment in these funds will be reduced. Let us take an illustration to understand this thing. Suppose Mr ABC invests `1 lakh in an international fund.

Assuming the rupee-dollar rates at `66 to a dollar, ABC can buy units worth around US$ 1,515. After a couple of years, say the units have fetched returns of 20 per cent. Thus, ABC's investment is valued US$ 1,818. Now, suppose the rupee has become stronger and the rupee-dollar rate quotes at `63 per dollar. If ABC decides to redeem the units, his units would be valued at `1,14,534 (63*1,818). Hence, the actual returns would be just `14,534, i.e. 14.5 per cent.

3. Political Disturbance: Investments made in foreign funds are exposed to geopolitical risks, i.e. these are likely to suffer from political disturbances in the country or region in which investments are made. 

Keeping abreast of such developments is not easy for retail investors. By the time a retail investor decides to withdraw in panic to avoid losses, it might be too late.

❝International mutual fund can be more risky than normal mutual fund❞
Harshad Chetanwala, Head - Customer Delight, Quantum AMC Pvt. Ltd.

What are international mutual funds and what is the difference between normal and international mutual funds? 

In international mutual funds, the fund manager invests in companies outside India, whereas in a normal mutual fund, the investment will be done in Indian companies listed in India. 

Are international mutual funds riskier than normal mutual funds? 

A good mutual fund manager will always try to reduce the risk, however, in the case of international mutual funds, there is additional risk of currency fluctuation, economic and regulatory environment. Hence, they can be more risky than a normal mutual fund. 

In your opinion, what would be an ideal time horizon for investing in international mutual funds? 

Any investment in equities, domestic or international, need to have a long-term horizon of more than 5-7 years. 

Should one look at international mutual funds for diversification purpose or do these funds have potential to outperform the normal mutual funds?

 There is a lot of potential in India and Indian companies at present and this potential would continue for a decade or more. Hence, investors are better off investing in normal mutual funds by investing in Indian companies. Some HNI Investors with higher risk appetite may like to look at these kinds of funds from a diversification perspective. 

The table here highlights the performance of different fund categories for the past eight years, starting from 2009 up to 2016. There have been two instances where the international funds have outclassed rest of the fund categories. The two years were 2013 and 2016. In the year 2011, where most of the fund categories delivered negative returns of over 20 per cent, international fund dipped just 6 per cent.