How to pick the right international mutual fund? (2024)

International Mutual Funds have become a popular investment option for investors in recent years as they have been turning to such schemes to get exposure to foreign companies and economies. The category has been gaining attention in the past 2-3 years in terms of asset growth and returns.

International mutual funds mainly invest in the equity, equity related instruments and debt securities of entities listed outside India. Some global funds invest in domestic as well as international markets, some in certain themes, while some are fund of funds (FoFs) under this category.

Fund of Funds (FoF) is a mutual fund scheme that invests in other existing mutual fund schemes. International/Overseas FoFs invests in units of offshore schemes.

Explaining the reasons as to why one should look at global funds, Tarun Birani of TBNG Capital Advisors said that these funds help get access to the best companies across the globe. The Indian market has a low correlation with some of the overseas markets, therefore, having global exposure ensures diversification. It also acts as a hedge against rupee depreciation.

Many mutual fund companies have been launching international/global funds, particularly more of those that invest in US tech companies or FAANG stocks. Investors have also been showing interest as they now prefer to look beyond domestic markets. However, one needs to look beyond the glamour of big tech names or particular sectors while picking up these funds. Experts say that investors should look at the theme as well as the structure from the perspective of growth potential, risks involved, and historical performance while investing in such schemes.

How to diversify

Considering concentration risk and other good diversification opportunities available, Divam Sharma, Co-founder, Green Portfolio Services said that investors should look into getting exposure to diversified themes while investing in international mutual funds. ‘’Like DSP world energy fund offers investors to take exposure to crude oil. There are other funds that offer diversification to other stocks along with the FAANG stocks,’’ added Sharma.

Under the international funds' category, Birani suggested dividing the allocation between developed markets like the US and emerging markets such as China, Russia, Korea, Brazil for having a better diversification. ‘’To start with, one can look at a 70:30 allocation for that i.e., 70 in the developed markets and 30 in the emerging markets. Rather than looking at big tech or FAANG funds, one should look at diversification as well as value and growth stocks,’’ he added.

Strategies to follow

Experts recommend that investors should keep a portfolio exposure of 10-15% to international mutual funds. As for the investment horizon, one should look at a minimum horizon of 3-5 years and look at it more as a build-up in the core portfolio for the long term. Having an investment horizon of over 3 years will neutralize the risk of short term geopolitical events and will also be beneficial from a taxation perspective as international funds are taxed like debt funds.

Also, these schemes are said to be more suitable for investors who are much more informed than a DIY or a first-time investor. ‘’Investment in international mutual funds might require an enhanced tracking as it carries dual risk. These funds are suggested for investors who already have exposure to mutual funds. They should have an understanding of international markets, structure of these offerings,’’ Divam Sharma said. He also recommended getting professional advice before looking to invest in such schemes.

Continuous monitoring is also suggested while investing in international mutual funds as geopolitical and currency risk is involved. ‘’Funds returns’ performance can change as per currency movements. Therefore, one needs to look at currency risk as an added risk. The risk associated with the specific market will also be there,’’ Birani of TBNG Advisors said.

Experts say that global markets have been flushed with liquidity with fiscal stimulus, therefore, equity as an asset class may continue to do well for them. They also suggest looking at this strategy in the current situation that we are in. However, they say that allocation to such mutual funds requires continuous monitoring and understanding.