Diversification is among the most important things when it comes to investing in the securities market. Diversification should not only be done in terms of sector, market capitalization, etc., but also in terms of geography. Geographical diversification refers to diversifying your investments across different countries. It shouldn’t be seen as a way to make quick returns but as a protection against domestic volatility.
Here’s all you need to know about international mutual funds:
What are International Funds?
International funds are mutual funds that invest in foreign markets. International funds differ in their underlying investment strategy – some international funds invest primarily in specific countries such as the USA, European countries, and other such developed markets, while a few others invest in a thematic way, i.e. in specific industries such as agriculture, mining, real estate, etc.
Features of International Funds:
(i) International Investments: International funds invest in foreign markets. Most of these funds invest in markets of developed countries to avoid the volatility of developing markets. Investing in developed markets is considered safer because of lower volatility. However, in case of underdeveloped and developing economies, there is huge potential for growth, but the economy is volatile.
(ii) International Fund – Asset Classes: International mutual funds come in various asset classes, the most popular ones being equity and debt. There are also funds which trade in currency, which is a lot more volatile than other asset classes. A few international funds may invest solely in one asset class, while a few others may go for a more balanced approach.
(iii) Professional Management: International funds are manged by the experts who have requisite knowledge, global reach, technology and skills to research and analyse companies in international market. As a small investor, you many not have the expertise and knowledge about investing in global markets.
Why One Should Invest in International Funds:
International funds can be an amazing addition to your investment portfolio if done correctly. As stated before, you should never chase international funds for the returns that they offer. A domestic investor with a moderate-to-high risk appetite should ideally not park all their investments in international funds and rather, add a small percentage of international funds to your investment portfolio.
The basic function of these international/foreign funds in your investment portfolio is to mitigate volatility of the domestic market. Even if the domestic markets are down, investments in foreign markets may still provide decent returns.
Downsides of International Funds:
While they do have quite a few pros, international funds also come with a few downsides:
(i) Lack of Portfolio Customization: International funds are managed by fund-managers along with a dedicated team of research analysts. This means that all decisions are taken by a centralized authority – herein the fund manager picks up various securities without regard for the investor’s personal research, and affinity to certain areas/commodities.
(ii) Geo-Political Risks: When investing abroad, geo-political situations play an important role. A bad situation in the country you have invested in can result in your gains being wiped out. Therefore, it is better to choose countries with a stable economy and a strong government.
(iii) Risks of Currency Movement: The final returns that you get out of an international fund depend quite a bit on the currency exchange rates. Most international funds are vulnerable to currency movements and very few of them provide hedging against currency movements.
International funds can be a great investment option to diversify your portfolio but there are certain risks involved too. You can get in touch with the Wealthapp financial experts to understand which international funds may suit your financial requirements.