A deep dive into international mutual funds

Regardless of which way is picked and which country the money is invested in, it is regulated by Securities Exchange Board of India.

From a personal finance standpoint, you can invest in mutual funds that target these sectors or themes. (Express Illustration | Tapas Ranjan)

An international mutual fund also known as Overseas Fund, as the name suggests, is a mutual fund that invests in Equity, Equity-related instruments and debt instruments of foreign companies i.e. based outside India.  

There are two ways in which the fund manager can invest In foreign companies - by directly purchasing the stocks of companies listed outside India or by investing in an existing global fund that already has a portfolio consisting of foreign stocks.  Regardless of which way is picked and which country the money is invested in, it is regulated by Securities Exchange Board of India.

International funds can help investors to broaden their investment horizons, resulting in a higher potential for return but it also carries high level of risks. These funds help to take advantage of global stock markets. However, understanding the global market movements, economic changes and their impact on fund investment is extremely difficult.   

Types of International Mutual Fund

•  Global Funds: These funds invest globally including in the home country. Whereas foreign funds are those available only in other countries.   
•  Regional Funds: It invests in companies from a specific geographical region. For example, Europe, Asia, etc. Investors with thorough knowledge prefer buying regional funds instead of global ones.    
•  Country funds: These invest in companies from a particular foreign country. It is very convenient as data is not spread across countries.    
• Global Sector Funds: These funds invest in a particular sector across the globe. Their primary agenda is to benefit from trends in a specific sector.   

Advantages

•  Geographical Diversification: One of the biggest advantages of investing in international funds is diversification across the globe. It helps to leverage the opportunities in foreign markets when the Indian economy may not be doing well but others like US are.   
•  Portfolio Diversification: International equity mutual funds are for higher risk tolerance investors, who are looking for portfolio diversification through investment in overseas markets so that when there is a market low in the home country, the one abroad can compensate for it.  
•  Currency Diversification: The Indian rupee has been depreiciating over the last few years, there are various reasons for this depreciation—from political instability to rising inflation levels to weak fiscal policies. One can take advantage of this situation by investing in international funds. When an investment is made in international funds, investors get exposure in foreign currency through investing in rupees. Any appreciation in the value of the foreign currency or any depreciation in the home currency will increase the returns.   
•  Professional Management: An individual may not be able to understand global markets and economics of different countries. A fund manager invests the investor’s money with the help of detailed data, technical expertise and experience of investing in foreign markets. This will help any new investor to take an opportunity in foreign markets through an international mutual fund.   

Disadvantages

•  Expense Ratio: Asset Management Companies charge investors a fee called an expense ratio—the charge to cover the fund’s administrative and operating costs, like a fund manager’s salary. It is usually higher in International funds.   
•  Economic & Political Risk: As international funds invest in other countries or regions, the change in the economic or political condition of the country can impact the performance of the country and, subsequently, this can affect the fund’s performance.   
•  Market Risk: The foreign country’s market fluctuation or sectoral fluctuation can impact the overall performance of the fund.   
•  Liquidity: In some foreign markets, securities trade less frequently, making it diificult to buy or sell securities.     

Funds covered

Franklin India Feeder Franklin US Opportunities Fund  
With an AUM of `3,205 Crore this fund has an expense ratio of 1.58 percent. The asset allocation of this fund is predominantly in Equity & Equity related instruments of companies situated in U.S. The top sectors invested In are Information Technology, Healthcare and Consumer Discretionary.  The fund’s performance is as follows: 6-months returns is 5.27 per cent, 1-year return is 35.04 per cent and 3-years return is 22.73 per cent.   

ICICI Prudential US Bluechip Equity Fund  
This fund has an AUM of Rs 1,282 Crore and an expense ratio of 2.23 per cent. The fund invests in Equity instruments of companies based in US. The asset allocation is such that close to 98 per cent is in equity and equity-related instruments. The top sectorial investments of this fund lie in Technology, Services and Healthcare. The performance over 6-months, 1-year and 3-years horizon is 26.21 per cent, 41.09 per cent and 23.10 per cent respectively.   

Edelweiss Greater China Equity Off-shore
It has an AUM of Rs 1,272 crore and expense ratio of 2.37 per cent. The regions this fund’s parent fund invests in include China, with a 71 per cent holding, Taiwan with 22 per cent holdings and Hong Kong with 6 per cent holdings. The top sectors include Information Technology, Consumer Discretionary and Financials. It has given returns of 12 per cent, 56.25 per cent and 24.44 per cent over the 6-months, 1-year and 3-years time frames.        

Ashok Kumar
Head of LKW-India. He can be reached at ceolotus@hotmail.com