Global mutual funds are one of the ways to tap international growth opportunities. They allow you to participate in equity markets that happen to be more diversified or doing better than India. There are scores of ways you can add a dash of diversity to your existing mutual fund portfolio. One way is to invest in funds that pool money in diversified equity portfolio. Another way to diversify is to buy funds that invest in debt instruments, or funds whose asset allocation is majorly in a particular sector/sectors, or, for that matter, funds having mid and small cap stocks as their holdings.
But there is another way of diversifying mutual fund portfolio i.e. venturing overseas and invest in another country’s stocks or overseas funds. Many fund houses have launched funds that do exactly this, i.e invesing in stocks of global indices or even fund of funds (FoFs).
Hedge Against Volatility
Global funds give new dimension to diversification process and provide hedge against domestic market shakeouts by investing in global markets that could be doing better than the Indian markets. For instance, there are economies in emerging markets that are doing well. There’s growing optimism even in some developed countries, and so, it does make sense to invest in these markets with an idea to not only diversify but participate in their growth story as well. You can change from developed to developing countries fund or from US or UK-based funds, or to China-based or Asia or Brazil-based funds
However, remember that these funds should only be a part of the portfolio diversification and not the entire investment. There are inherent positives and negatives in all countries as they are susceptible to various internal developments. There’s a plethora of funds available in the domestic market catering to various themes thus giving an option to attune investments as per market conditions. However, this is not the case with international funds, which invest based on limited themes, have limited options in terms of available products and invest according to their own mandate.
Variation in Return
Countries or stock indices these international funds pick for investment are based on the objective of the scheme. Among the global schemes Asia, China, Indo-China, Emerging Markets and US are the most popular themes and have been fairly successful. However, many funds investing in commodity stocks have more diverse choice based on themes like agri-business, precious metals or multi commodities and are not restricted to any particular index or country.
Global funds have been good in terms of performance too. In a short term horizon, say between 3 months and 6 months period the Asia-based and emerging market based funds have underperformed US-based funds. In the short term, US- based funds have performed well owing to the positive data coming out from the US such as positive developments in terms of employment data and growing investor confidence. However, in the long term horizon, say 1 year and above, the Asia based and emerging market funds fared well than the US-based funds.
Watch Out For
Global funds can be considered by investors who are looking for further diversifying their portfolio into global markets. For investors who believe in growth story of not only India but also other emerging markets, these funds can be a very good investment as a part of asset allocation to diversify across borders and take advantages of global developments.
However, these funds do not come without any risks. The most formidable risk is the currency fluctuation risk. If the rupee depreciates against the dollar there’ll a rise in the NAV of most of these global funds thereby giving you good returns. On the other hand, rupee appreciation could take a large bite off the returns. This is mainly because the rupee you give to the fund house is converted into the local market’s currency and then invested, hence currency fluctuation risk. Currently, as the Indian rupee has weakened much against the dollar, this could be a good time to go for global funds. But remember that if the rupee starts appreciating, returns could be adversely affected.
Another factor that you need to watch out for is the expense ratio — the fund management charges in percentage that you pay to the fund house that also includes registrar fee, marketing expenses and so on. A higher expense ratio would eat into the net return of the fund.
So if you’re keen on investing in a global fund keep an eye on the time horizon you’re going to hold the fund for and don’t ignore the associated risks.