Should You Invest in International Mutual Funds?

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  • 29 Dec 2023
Should You Invest in International Mutual Funds?

What are International Mutual Funds?

International mutual funds invest in a diversified portfolio of securities from foreign countries. These funds provide an opportunity to gain exposure to global markets.

Benefits of Investing in International Mutual Funds

Here are the benefits you get when you invest in international mutual funds:-

  • Geographical Diversification

One of the primary advantages of international mutual funds is geographical diversification. You spread your risk by investing in companies across different countries and regions. If one country's economy is not performing well, investments in other areas may help offset potential losses.

  • Access Growth Opportunities

Investing internationally allows you to tap into the growth potential of emerging markets. Some countries may experience rapid economic growth, providing opportunities for higher returns compared to more established markets.

  • Currency Diversification

International mutual funds often involve exposure to different currencies. This can be an advantage as currency movements can impact investment returns. Diversification in currencies can mitigate the risk associated with fluctuations in domestic currency.

Working of International Mutual Funds

Investing in international mutual funds parallels investing in any other equity mutual fund. Investors contribute money in rupees; in return, the fund allocates units to them. The fund manager then invests these funds in stocks of companies listed on foreign exchanges. The fund manager employs two methods to invest your money in foreign stocks:

  • Directly purchasing stocks to construct your portfolio
  • Investing in an existing global fund with a pre-designed portfolio comprising stocks of foreign companies

Regardless of the chosen method, Indian mutual fund companies administer these funds. Like all other mutual funds, SEBI regulates them.

Choosing an International Mutual Fund for Investment

Opting for an international mutual fund for investment is no different from investing in a regular fund. Look out for these things before investing:-

  • Zero-in on the Geography You Wish to Invest

When selecting an international mutual fund, choosing the geography in which you wish to invest is crucial. Different regions and countries exhibit distinct economic conditions, growth potentials, and risk profiles.

Begin by assessing your comfort level with risk, as emerging markets may offer higher returns but often come with increased volatility. Consider the economic stability of the countries within the chosen geography, as well as the political and regulatory environments. Evaluate the growth prospects of the region's industries and sectors, aligning them with your investment goals.

  • Compare the Fund to its Benchmark

Before investing in an international mutual fund, it's crucial to compare the fund's performance to its benchmark. The benchmark is a reference point, typically representing a specific market index or a group of similar investments. By assessing how well the fund has performed to its benchmark, investors can gain insights into the fund manager's ability to generate returns. If a fund consistently outperforms its benchmark, it may indicate effective management and strategic decision-making.

On the other hand, if the fund consistently lags behind its benchmark, it could raise questions about its performance relative to the broader market. This comparison helps investors make informed decisions, ensuring their chosen fund aligns with their financial goals and expectations.

Risks of Investing in International Mutual Funds

While investing in international mutual funds has its share of benefits, there are certain risks too. These involve:-

  • Currency Risk

While currency diversification can be an advantage, it also introduces currency risk. Changes in exchange rates can impact your investments' value. Awareness of this risk and how it may affect your returns is essential.

  • Political and Economic Risks

Investing in international markets exposes you to political and economic risks in different countries. Factors such as government instability, regulatory changes, or economic downturns can impact the performance of international mutual funds.

  • Market Volatility

International markets can be more volatile than domestic markets. Economic and geopolitical events in different parts of the world may lead to fluctuations in stock prices, affecting the value of your investments.

Should You Invest?

Deciding whether to invest in international mutual funds hinges on your goals, risk appetite, and investment horizon. If you seek diversification and are comfortable with the associated risks, international mutual funds can be valuable to your investment portfolio.

It's crucial to carefully research and choose funds that align with your investment objectives. Consult with an experienced financial advisor offering personalized advice based on your circumstances.

FAQs

Investing internationally can provide support during market downturns. Global markets offer a higher probability of long-term growth, making them efficient in the long run. Additionally, it enables investors to explore various markets, sectors, industries, risk courses, and other areas.

It depends on individual preferences. It’s wise to start small and not expose too much initially. You can take a call based on the performance.

Have a holistic knowledge of where the fund invests, its expense ratio, and the associated investment risks before investing in an international fund.

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