Benefits of having international investments in mutual fund portfolio
Most investors who sell in India only invest in home currency, hybrid, or credit. However, interest in international investment has been growing in the past. According to AMFI data, the total amount of AUM in Fund-of-Funds Overseas was only Rs 2,734 Crores as of 31 March 2020. For the last year ending 31 March 2021, AUM in the Overseas Fund has increased at Rs 12,408 Crores, approximately five times more than the property.
The benefits of international diversity
Divide the risk of a single country: Shared shares of different shares separate stock or other risks, but if you only invest in a domestic currency, you will be exposed to one country. Most investors tend to ignore the risk of one country because the country in question is their home country. But, experienced investors should be aware of this risk as they build their partnership portfolio. Globalization can be manifested in a variety of ways e.g. natural disasters or catastrophes, or a geopolitical crisis (e.g. war threat).
Divide currency risk: While monetary risk is also a country risk, we think it should be addressed specifically. Although the financial risk may not directly affect you, if the money you spend is in local currency, it will affect investors who may need to plan to use foreign currency. Currency risk can directly affect you in terms of higher inflation. With the diversity of countries around the world, you can take advantage of the risks of foreign exchange but we will discuss it later.
Exposure to various investment themes: International investment can provide you with exposure to major styles that are not yet available in the Indian stock market. The Indian stock market is still dominated by traditional industrial sectors e.g. banking and finance, oil and gas, IT / consultation outsourcing, FMCG, Pharma, car, cement, etc. However, in advanced markets commercial technology companies market leaders. The top 5 companies with a market capitalization in the S&P 500 index are all technology companies e.g. Apple, Microsoft, Amazon, Alphabet (Google), and Facebook. Popular themes appearing around the world are robotic and artificial intelligence, electric vehicles, cybersecurity, cloud computing, e-commerce, social media, etc. These stocks are not yet available in the Indian stock market.
Provide stability in your portfolio: There is a low correlation between the returns of various markets. Investing in global stocks can be extremely risky and bring stability to your portfolio. The chart below shows the return of the MSCI India Index and the MSCI World Index in terms of monetary policy (US Dollars) over the past 11 years (since 2010). You can see that, over the past 9 years, there have been significant differences in the performance of the MSCI India Index (USD) and the MSCI World Index (USD).
It is not as if India has not performed well - in fact, India has surpassed the MSCI World Index by 5 years in the last 11 years (ending 31 December 2020). However, in the many years when India has been operating indefinitely, the MSCI World Index has gone too far (and fundamentally). A portfolio containing domestic and foreign currency can bring stability and profitability.
Returns for MSCI India Index and MSCI World Index in terms of fixed currency (US Dollars) 11 years ago.
Profit on currency transactions: International currency segregation can not only protect against financial risk, and can lead to foreign exchange earnings from the depreciation of the Indian Rupee (INR) compared to the US Dollar (USD) or other foreign currencies. March 2021), INR reduced its combined annual growth rate (CAGR) by 5.9% compared to USD (source: Investing.com, Time: 1 April 2011 to 31 March 2021). The decline in the INR alone would provide a significant portion of the return on international investment.
Risks of global investment
While international investment has its advantages, investors must also understand the risks to be able to make informed investment decisions.
Country risk: Just as domestic finance carries a national risk, so foreign currency carries with it the risks of a particular country in that country. Risks in emerging markets are often higher than in emerging markets. Investors should look at the risks and build their equity portfolio consisting of domestic and foreign currencies depending on their risks.
Financial risk: Financial risk can work in both ways. While the international investment may provide higher returns if the domestic currency (INR) falls compared to foreign currencies (e.g. USD), a different effect will be seen if the domestic currency is more valuable compared to foreign currency. You need to understand the financial risks and invest according to your investment needs and risk interest.
Global market information: Foreign investment requires knowledge of global markets and themes/sectors that may not exist in India. Even domestic fund managers may not have the necessary investment skills in international currencies. Investors may consider applying the technology to global asset managers, with local market presence and knowledge of investing in global markets. Investors should also understand the product they are investing in and consult with their financial advisors.
How to invest in international rates
Mutual funds provide solutions for investors who want to be exposed to overseas stocks without going to a foreign trader. There are Exchange Traded Funds (ETFs) that invest in international currencies, however, the most popular solution, which also provides a wide range of investment options, is Mutual Funds that invest in international currencies. You should consult your financial advisors to find out more about these investments.
There are several factors to consider in plants around the world: -
Asset Allocation: Investors can view international equity as a category of assets and equity in domestic, debt, and gold. The distribution of assets should be done by the wishes of financial risk and financial needs.
Taxes: In contrast to domestic equity funds, foreign currencies (Funds) are taxable as loan funds. Short-term profits (holding period of fewer than 3 years) are taxable at the level of investor income and long-term interest is taxed at 20% after approving the indexation benefits. You should consider taxes to make informed investment decisions.
Track fund manager record: As mentioned earlier, international currencies require tangible technology. Most international currencies are structured as Fund-of-Funds. Investors should look at the long-term performance of the primary/feeder fund. You can find details about the operation of the basic fund/feeder in the Scheme Information Document.