Is adding foreign funds to portfolio beneficial?
Do you want to invest in global stocks such as Amazon or Facebook and share in the robust growth of these companies? Then the best way is to invest in foreign funds offered by Indian mutual fund houses. Foreign funds invests in firms in other countries other than the companies in their home country. Investing in these funds will provide greater diversification to your portfolio.
Benefits of investing in foreign funds
Investing in these funds will provide geographical diversification to your portfolio
Helps in mitigating the risk that is involved in home country.
Helps to leverage on the varied economic cycles of different countries
Provides insulation against political, social and natural disaster risk in the home country.
Provides an opportunity to earn greater returns by investing in world’s top corporates.
Easiest and cost-effective way of investing in foreign companies.
Risk involved in foreign funds
There are 3 major risks in investing in foreign funds and these are explained below
Foreign Exchange Risk
The investment in foreign funds are made in your home currency and then converted to the currency of the country you are investing. When selling the investment, the money you received will be based on the prevailing exchange rates. So, at the time of selling, if the Indian rupee is strong then you will receive less money in rupee as your NAV will be adjusted according to the currently prevailing exchange rate.
For taxation purpose, investment in foreign funds will be treated as debt funds even though they invest in foreign equities and they are taxed accordingly. However, this risk can be mitigated by investing in a fund which has exposure of 65-70% to Indian equities and rest in foreign equities. The following funds invests some part of their AUM in global equities as mentioned below.
Investment in foreign funds carry the risk of exposure to political risk currently prevailing globally.
Options available for investment in foreign funds.
Investors willing to invest in foreign funds have various options. Currently there are more than 40 foreign funds available in India. Exchange Traded Funds (ETFs) and Fund of Funds (FOFs) are the easiest way to invest in foreign funds.
There are funds that invest in particular country, these funds are called regional funds. Some funds are sector-specific funds such as gold or real estate funds. There are regular equity funds too that invest a portion in international companies.
How to choose a best foreign fund?
As with any other mutual fund investment, thorough study of the funds facts sheet is necessary. Choose a fund whose objective fits into your investment goal and risk appetite. Diligent study of the track record of the fund and its fund manager should be made. Also, it is important to compare the expense ratio of these funds. On an average, foreign funds expense ratio has been 1.5% of the fund asset every year.
While investing in foreign funds provides wider diversification, it also involves risk as it is with every investment options. So, investors should apply due diligence in selecting the best fund and keep track of the investment closely. Should avoid investing in funds that invest in one particular country or in funds that are sector-specific. The biggest risk, exchange fluctuation risk can be reduced by hedging with currency futures. Or the simplest way is to invest when the Rupee is appreciating and exit when Rupee falls. However, adding a small portion of say 10-20% of “Diversified” foreign funds to your portfolio will definitely give better returns in the long run.
Some funds that allow you to invest in foreign stocks
Principal Global Opportunities Fund
Kotak Global Emerging Market
Franklin India Feeder Franklin US Opportunities Fund
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