Should International funds be part of investor portfolio?

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The Rupee witnessed a steady depreciation against the Dollar in the past few months, increasing anxiety for all in general. However, the investor community can possibly capitalize on this situation by considering their investment in international funds. This would additionally be a great approach to diversify their investment portfolio. International funds are mutual funds which invest in stocks of companies outside India. These kinds of funds are specifically beneficial to those who wish to have a good amount of exposure to some of the largest companies around the world with a heavy global presence and reputation. Purchasing foreign mutual funds is certainly a good way to expand portfolios; not to forget the investment objectives and financial goals, as they matter too. As per finance experts, portfolios having the best of both domestic and international markets could be better equipped to mitigate risks, given the volatile nature of stock markets and economies of different geographies in general.

Money allocation is a significant point of consideration when it comes to investing in international funds. This essentially is dependent on risk appetite and the length of investment horizon of individual investors. Therefore, there is no definite response or a predetermined strategy as to whether or not to invest in international funds since it differs from investor to investor. However, a few guidelines could possibly come to the rescue in order to put things in perspective and help investors make wise choices.

It is imperative to analyze the optimum international exposure for a portfolio. Although international markets are a great option for higher returns when the domestic market is down, aggressive allocation will not make any sense as these markets tend to be very volatile and risky some times. Most advisors recommend parking 15% to 25% of money in international funds. This is to ensure security of the portfolio if international markets fall out of favour. It is advisable to capture multiple regions at international level instead of sticking to "20% allocation to one single international market focusing on one country or region". Thus, spreading investments across the US, Asia, Europe and emerging markets would be more meaningful as it would lead to a balanced exposure. Moreover, it would even serve the purpose of portfolio diversification.


Another key aspect to focus on is future expenses. If investors have future plans such as relocating to another country, vacationing abroad or higher education of their children in a foreign country, they might want to consider investing in international funds. The money is invested in dollar denominated assets acting as a hedge against exchange rate movement and helping with dollar based transactions. International funds could be country based, commodity based or theme based (investment in specific sectors such as energy, real estate etc.). However, returns from international funds depend on overseas market conditions and performance. Also, investors must ideally be aware of currency fluctuations. According to previous records, markets in the US and China have been performing consistently well over the past few months and look quite promising. However, choosing a region that has lower or absolutely no correlation with Indian markets is recommended if portfolio diversification is the target.

Investing in international funds has many advantages but assessing the risk of investing in international funds is of paramount importance too. Returns could be affected if the Rupee appreciates against the currency in which the fund is invested. Gains after redemption post taxation should also be taken into account while taking investment decisions. Returns acquired by redeeming international funds within 3 years are taxed according to the tax slab of investors while those redeemed after 3 years are taxed at the rate of 20% with indexation benefits.

International funds are ideal to hedge currency exposure, bring geographical diversification to the portfolio, help avoid complete dependence on domestic markets especially when they are not performing well and eventually contribute to the stability of the portfolio. It is advised to maintain a level of discipline similar to the investing discipline maintained with respect to regular Indian/domestic market. Financial planners and advisory are of the opinion that having expertise is of utmost importance for making prudent choices as far as investment in international funds is concerned. As always, it goes without saying, being well informed about global markets and fathoming the currency movements are chief parameters. These will perhaps assist with making appropriate decisions that would align properly with the financial goals and objectives of investors. Investment in international funds is a complex task and hence requires a good amount of analysis of all the above factors in order to facilitate judicious investing. 

 

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Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements before choosing a fund, or designing a portfolio that suits your needs.