International Mutual Funds - Meaning, Features & Benefits
In the present market scenario, investors are seeking new ways to make profits and fresh methods to invest their hard-earned capital. A potentially efficient way to diversify your financial portfolio may be to look towards purchasing foreign ETFs, equity, or making investments in international mutual funds. However, as attractive as this may seem, with investors getting strong exposure to companies worldwide, investors should know how much of their assets to allocate to these funds and what funds they should choose to invest in.
Of course, selecting funds to invest in is largely dependent on the individual investor’s goals and financial horizon, not to mention the particular kind of international fund in question. Nonetheless, the appeal of international funds can be addictive and it's important to do your homework before you make an informed decision. Read on to understand the crux of international mutual funds and their benefits and features.
What are international mutual funds?
The name says it all when anyone talks about international mutual funds. International mutual funds are mutual funds that invest in equities or debt instruments of foreign firms/businesses. Such funds are also termed “Overseas Funds” or “Foreign Funds”. In the past decade, investors have looked to international markets for investment with the aim of portfolio diversification. The logic behind this is that stock indices of various countries will likely not shift in the same way or at the same time, giving investors a chance to lessen their risk over investments.
Besides the obvious appeal and fascination of international exposure to companies, an international mutual fund can be invested in a few ways, adding to its draw. Similar to the working of all mutual funds, in international funds, investors buy units of an international mutual fund. Then, the fund manager of an international mutual fund invests in global markets by buying equity directly and structuring a fund portfolio or invests in an international mutual fund with a fund portfolio comprising global stocks and securities.
Key Features of International Mutual Funds
Before you invest in an international mutual fund, it is important to note some of its relevant features, listed below:
Portfolio Diversification: The main reason that investors may consider international mutual funds for investment is the opportunity they generate for portfolio diversification. For instance, in the Indian context, an investor with a collection of domestic securities and assets may think of expanding their financial holdings to global markets. Apart from this, investors consider that the likelihood of global indices moving in tandem is potentially rare. Hence, in case one or some securities lose their value, the others will suffice to balance the strength of the overall portfolio.
High-Risk Mutual Funds: While international funds may offer potentially high returns, they also have inherent risks. Changes and shifts in global markets may affect international funds, not to mention any events of a political nature. Another factor to note while considering the risks of investing in international funds is the fluctuation in currencies. These are international funds, and currency rates may change the dynamics of funds, having potentially negative effects. However, currency shifts may turn in a positive direction too.
Mutual Fund Management: The fund managers of international mutual funds are always required to remain vigilant and attuned to global market trends and events that affect investments. Fund managers bring attributes of expertise in mutual fund management and unmatched experience in the field to every fund they handle with the utmost efficiency. Therefore, investors can sit back and relax in the knowledge that fund managers will do their best to optimise funds to earn returns.
Advantages of Investing in International Funds
If you know the answer to the question, “What are international funds?”, it is time you learned about the pros of investing in international funds. The benefits of investing in these funds are explained below:
Expertly Managed Funds: International mutual funds are managed and run by savvy managers who have relevant knowledge and experience regarding international markets and finance. These fund managers are responsible for investing in assets and securities with the aim of optimal reward realisation for mutual fund unit holders, that is, investors in the funds.
Diversification of Investment Portfolios: Typically, Indian investors hold largely domestic investment portfolios. Foreign mutual funds offer Indian investors effective exposure to global markets and introduce them to the international realm of finance. International funds can diversify your portfolio so you may potentially achieve gains from a balance of investments - when some investments are low, your overall portfolio remains robust due to the rest of it being on the positive side.
Geographical Expansion and Risk Management: Different markets around the world may perform differently at any given point in time. Investors can leverage the feature of geographical diversification with the best international mutual funds, where some markets may perform negatively, while others may be on an upward trend. This mitigates the overall risk in your financial holdings and lets your finances remain healthy through ups and downs in the markets.
Types of International Mutual Funds
There are quite a few kinds of mutual funds that invest in the international markets in different ways. These are highlighted below:
Global Funds: While you may think the terms “global funds” and “international funds” are interchangeable, they are not alike. Global funds are mutual funds that invest in companies in markets all over the world. Such funds may comprise foreign companies and include international corporations in your home country too. However, when you speak about international mutual funds, these invest in purely overseas companies and don’t include any in your home country.
Global Sector Funds: These are international funds that invest in international firms belonging to a particular sector in different countries worldwide. The main concentration of such funds is to have exposure to a specific sector but on the international stage.
Country Funds: Investors may want to invest in international companies, but restrict their investment in international funds to a single country. Therefore, investors invest in a fund with securities and assets of one country. This permits an investor’s exposure to one country’s economy and financial market.
Regional Funds: These international funds focus on investment in companies in a particular international region anywhere in the world.
Who should consider investing in international mutual funds?
In case you are wondering whether you are a potentially suitable investor-match for international mutual fund investment, you may consider the following to make your choice:
Equity investors having solid exposure to domestic financial markets and a well-balanced portfolio may consider international mutual funds for investment. Generally, potential international fund investors must be seasoned market players who know about international markets, rather than novices who require experience to invest potentially prudently.
Those seasoned investors who wish to play a role in the growth of certain global corporations may consider international funds. Some of these international firms may not be listed on Indian exchanges, and international mutual funds are a way to invest.
Investors who wish to leverage opportunities in different markets may invest in international funds. While all markets go through upward and downward trends at some stage or another, with international funds you can bet on some companies to do well while others go through downturns and have a balanced portfolio.
Investors with a long-term investment horizon may consider investment in international funds as these may potentially yield profits over a 5-year duration or more.
Conclusion
International mutual funds are an investment option for long-term investors to consider. They also come with a higher risk factor compared to domestic funds, as international markets are prone to many factors that influence funds on a global scale. While many international funds available to Indian investors offer exposure to world players like Facebook and Google, these funds must be accessed for their viability of investment regarding any particular investor and their investment goals. Nonetheless, international funds may be considered as they are potentially a way to lessen the risk in any portfolio on account of the fact that potential downturns would not be likely to occur across international markets.
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FAQ
How do international mutual funds work?
International mutual funds are mutual fund instruments that invest in securities and assets from all countries, other than the home country of the investor. These mutual funds offer exposure to emerging and developed economies globally. Such investments usually complement an investor’s domestic investment portfolio with a level of diversification that may potentially mitigate an investor’s risk.
Are international mutual funds safe to invest in?
International mutual funds may prove to be potentially risky in case of certain risks like political instability, inflation risks, credit risks, and other risks that affect domestic mutual funds. Additionally, international mutual funds, although potentially profitable, may be considered risky due to currency fluctuations. However, while choosing mutual fund investment, investors must make it a point to evaluate a fund’s performance potential, and other factors, aligned with their financial position, investment horizon, and goals.
Do I have to pay tax if I make money from my international mutual fund investment?
Any profits you may potentially make out of your international mutual fund investment are taxed in a similar way to the taxation levied on returns from debt funds. The tax you pay is based on the holding period, that is, the duration you remain in the fund.