Imagine you are an investor putting all your eggs in one basket. You have been investing in domestic mutual funds that have served you well in the past. However, you have noticed that your portfolio is heavily dependent on the domestic economy. Any fluctuations in the domestic market could have a significant impact on your investments. So, what can you do to hedge this risk?
You can diversify your portfolio with international mutual funds and spread your investments across different geographies. This way, you get exposure to stocks, bonds, and commodities of a foreign country, which can reduce your portfolio’s dependency on any one market. This further gives you the opportunity to participate in the growth of global brands and corporations that are not listed in India.
Yet, there’s a catch. Investing beyond your nation’s borders demands different approaches, strategies, and tactics. So, don’t think that buying international funds means instant portfolio success. Instead, focus on what you should consider before investing in these funds to get maximum output.
- Assess the geopolitical landscape
Before you invest in mutual funds focusing on foreign investments, don’t overlook the current political situation in a specific country or region. Countries in political or economic turmoil, or those nearing it, indicate considerable risks.
For example, if a nation faces sanctions, companies within it might struggle to perform well. So, the mutual fund scheme that has invested in those companies may see a decline in value. Or consider a country experiencing political unrest. The instability can put your investments at risk. So, it’s recommended to keep an eye on what’s happening worldwide when investing internationally.
- Currency risk
When you invest in foreign funds, remember you expose yourself to currency risk. If the rupee weakens against the foreign currency, your investment value in rupee terms rises. However, a stronger rupee could reduce your returns. For instance, consider a US-based fund. If the rupee falls against the dollar, you stand to gain more when you sell your investment. Yet, if the rupee grows stronger, your potential profits could shrink.
- Consider diversification
Most investors invest in mutual fund schemes to add diversification to their portfolio. Yet not all international mutual funds offer the same level of diversification. Some funds focus solely on developed markets like the US or Japan. Others may target emerging markets like Mexico and Brazil. The key is to pick a fund that aligns well with your existing portfolio. For example, if your portfolio contains mostly US stocks, consider a fund focusing on Asian or European markets for a better balance.
- Review fund managers
Management teams play a vital role in mutual fund performance. Look into their past records. If a manager has demonstrated consistent performance, this might indicate a well-managed fund. For instance, if you study a Japanese equity fund investment with solid five-year returns, scrutinise the management team behind it. Their strategies and choices can give you clues about how the fund might perform in the future.
- Economic indicators
A country’s economic health plays a vital role in the performance of its companies and, thus, your investments. Look at aspects like inflation rate, employment numbers, and GDP growth. For example, investing in a country with high inflation might not be a good idea as it erodes purchasing power. A nation with low unemployment rates and stable GDP growth, however, would likely be a safer bet for your money.
International funds: Your ticket to global investments
International mutual funds offer exciting opportunities, but it is not a decision to make lightly. Weigh the risks, consider currency implications, understand tax rules, review management teams, evaluate costs, and think about diversification.
Remember, international markets hold potential, yet the stakes are high. Combine knowledge with strategies for the best results, take calculated risks, and remain cautious. One avenue to approach this investment is through a systematic investment plan. This strategy lets you invest small, fixed amounts periodically and leverage rupee-cost averaging over time to minimise the risk of price fluctuations in your portfolio.