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Decoding International Funds – How They Fare Against Domestic Mutual Funds?

international vs domestic mutual funds

Highlights

  • How do international mutual funds differ from domestic funds?
  • What percentage of your investment portfolio should be safe to invest in international funds?

As foreign cab aggregator UBER goes the IPO way, the mild talks about investing in international mutual funds are becoming louder than ever. Do you also aspire to invest in biggies like Alphabet, Apple, Facebook and Amazon? Do you want to know about international mutual funds and how are they different from Indian mutual funds? Would you be interested in knowing what percentage of your investment portfolio should you invest in these funds?

If your answer to all above questions is yes then this article is going to illuminate you about the same!

What are International Mutual Funds and it’s different types?

The mutual fund schemes that invest in overseas markets are termed as international schemes. These funds invest primarily in securities of foreign companies listed in foreign markets. when compared to domestic funds; they differ in structure, the markets they invest in and the type of asset class they take exposure to.

Though there are no clear sub-categories of the international funds; most general type among these are the country and region specific funds. Let’s have a look at different types of international mutual funds based on different markets.

Emerging Market Funds

This type of mutual fund invests in emerging markets like India, China, Russia, Brazil etc.These countries are expected to grow tremendously in the coming years making them a hot choice for investors. People who go for these funds are mostly look to gain heavy irrespective of the risks of a fluctuating economy involved.

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Developed Market Funds

Developed market funds are an attractive option because it is generally seen that mature markets are more stable. Also, they do not have the problems associated with emerging markets like a fluctuating economy or political instability, etc. making them less risky and a safer abode for investments.

Country specific funds

These funds become a good choice for investment when there are opportunities in specific countries due to various reasons. But the flip side of this would be that the portfolio is dependent solely on one economy. Hence, increasing the risk factor.

Why do people invest in International Funds?

Diversification – Diversification helps reduce the risk with any single investment. It smooths out returns during periods of unpredictability.

Ease of Investment – Buying units of an international mutual fund is now easier with a variety of funds available in India.

International Exposure – With international investments you can own some of the best quality corporations in the world.

Currency Fluctuations – The exchange rates fluctuate every day, or more so, every minute. This means that for a scheme investing in US Dollars, the NAV of the scheme would be impacted as per the dollar-rupee movement. This comes handy for investors from developing countries as the more their currency depreciates, the better the gains!

Things to do before you pick an International Fund for investment

STEP 1 – Check the track record of the fund, its managers
STEP 2 – The scheme you choose should complement your current portfolio
STEP 3 – Read the document for any underlying costs and expenses
STEP 4 – The country you choose to invest in should have a tax treaty with your country. This rules out the scenario of double taxation

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After you are done with the above steps, it’s only then you should move ahead with your investment.

Top 5 International mutual funds

Let’s have a look at how are some international funds faring with their 1yr, 3yr, 5 yr and 10 yr returns

Fund NameLaunched on1 yr Return3 yr Return5 yr Return10 yr Return
DHFL Pramerica Global Equity Opportunities FundMay 201017.19%11.95%2.59%NA
ICICI Prudential US Bluechip Equity FundJuly 201215.22%13.48%11.40%NA
Reliance US Equity Opportunities FundJuly 201514.42%15.66%NANA
Motilal Oswal NASDAQ 100 Exchange Traded FundMarch 201113.83%21.64%19.47%NA
Franklin India Feeder Franklin US Opportunities FundFebruary 201210.69%17.01%14.20%NA

Source – Value Research

Now let’s compare the returns on these funds with the average returns of different categories of equity mutual funds in India

Equity Fund Category1-year Return3-year Return5-year Return10-year Return
Large-cap Fund3.34%13.78%12.73%13.97%
Multi-cap Fund-1.70%12.87%14.79%16.57%
Mid-cap Fund-9.71%11.26%17.54%20.61%
Small-cap Fund-16.16%11.50%18.75%19.48%

Source – Value Research

Did you notice something? International funds have given good returns for shorter span rather in the longer run. Where as the returns on domestic equity mutual funds have gone the other way. This is a result of strong corporate earnings, dollar appreciation and robust growth in the U.S. economy in the last couple of years, four of the top 5 international funds are dedicated U.S. based funds and the fifth one has a considerable exposure to the U.S. economy. But will this continue? A weakening dollar, tepid economic growth and the looming trade wars with China could reverse flows from the U.S. to developing markets like India.Buying a fund or a country specific fund just based on 1 year’s performance is myopic in our view. Also the level of understanding we would have about different economies and different international companies would be limited.

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This also gives credibility to 3 important sayings in the arena of mutual funds –

A. Investing for a longer period is good.
B. Do not base your investment portfolio around a single type of funds.
C. Diversification is good.

Our take – One should stick to domestic funds with consistent track record as over a long period of time they have outperformed their international peers and poised to repeat this performance in the future.If you want to invest in international funds then make sure you are not depending on them too much. You can allocate a certain part of your investment portfolio, say around 5-10%, to invest internationally. This way you will also remain insulated to the ups and downs of international markets as your domestic funds will keep on reaping benefits for you in the longer run.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Information contained in this article is not a complete representation of every material fact and is for informational purposes only. The recipient is advised to consult its advisor/ tax consultant prior to arriving at any investment decision.

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