Liberalization
and globalization have made it possible for people across the globe to connect
with the economies of other countries and tap into international market
movements. One of the effects of this increasing connectivity is that Indian
investors can now park their money in investments abroad. If you’re an investor
residing in India, you can purchase investments from foreign financial markets
to add some diversity to your portfolio. International mutual funds are among
the most popular kinds of foreign investments chosen for the purpose of portfolio diversification.
What are international funds?
International
mutual funds are funds that invest the pool of money in foreign companies.
These funds are also referred to as overseas funds or foreign funds, and they
make for good long-term investment options. The top mutual funds that
invest in foreign companies help you to diversify your investments into the
best global companies and sectors that are not available in your home country.
These funds have the potential to generate good returns over long term
horizons.
Some
foreign funds invest directly in international stocks, while others invest in
international indices like NASDAQ or S&P 500. Another kind of foreign fund
acts as a feeder that invests in specific mutual funds in the international
financial markets.
Why invest in international
funds?
One of
the primary reasons to consider investing in international funds is the
diversification of investments along with decent returns. As of April 2019, the
top mutual funds investing in international financial assets yielded 1-year returns
exceeding 20%. By contrast, index funds and exchange-traded funds linked with
the Sensex gave returns below 15% for the same period.
Aside
from the apparent financial rewards of investing in international mutual funds,
there’s also another reason to consider including these investment options in
your financial plan. Investing in the top
mutual funds connected with overseas companies,
helps achieve a higher level of portfolio
diversification. This can be particularly
useful if you have an investment portfolio that’s quite limited. It can also be
an advantage if your portfolio has an assortment of investments, because buying
mutual funds that invest in foreign companies can help you diversify your set
of investments further.
How can the top
mutual funds investing in foreign companies help with diversification?
International
funds bring two kinds of diversification to
your investments. Let’s get a better look at both these advantages.
Portfolio diversification
A
balanced portfolio must typically include assets with varying levels of
risk-reward combinations. You need to invest in low-risk, medium-risk, and
high-risk securities to spread your overall risk exposure sufficiently. By
purchasing the top mutual funds that invest in the international
financial market, you can add a new layer of risk exposure and compensation to
your existing portfolio.
Geographical diversification
Investing
in the financial markets of different countries helps you take advantage of the
cyclical nature of the global economic system. As a result of investing in
assets from multiple countries, you can balance out the risk associated with
certain points in the economic cycle of your home country. For instance, if the
economy in India is at a low, you can set off the potential losses with gains
from a foreign market.
What are the different types of international
funds?
There
are different types of international funds that you can choose from. Understanding
these different varieties can help you make an informed decision about the kind
of funds to include in your portfolio.
Regional funds
These
are mutual funds that invest in the financial assets of companies located in a
specific geographic region. The economic, political, and social climate in that
region influences the movement of the fund’s value.
Country funds
Country
funds are mutual funds that invest solely in the assets of one particular
country. The greatest advantage of these funds is that it becomes easier for
you to study the scenario in that country before investing in the relevant
funds.
Global funds
Although
they sound like international funds, global funds are a tad bit different. They’re effectively funds that deal with
financial assets from all over the world, including your home country.
Global sector funds
These
mutual funds choose to focus on any one sector of the economy, and then use the
money pooled in to invest in financial assets pertaining to that sector on a
global scale. You can use global sector funds to leverage the potential profits
in a particular industry.
Conclusion
The
important thing to remember before investing in international funds for portfolio diversification is that while the basic tenets are the
same as they are for investing in mutual funds, you need to perform a bit of
additional research before investing in foreign funds. If it’s your first time
investing in international funds, it’s prudent to seek the help of a
professional wealth manager.
Tata Capital offers an exclusive wealth management portal for investors like you. Using the services available thereon, you can choose the top mutual funds that invest internationally and make the most of global market movements. Tata Capital’s wealth management services also help you grow your investments and access expert advice on matters related to mutual funds.
20 April 2020
5 mins read
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