International mutual funds as a category
have gained both prominence and acceptance in recent times by the average
retail investor.
This should not come as a surprise given
the recent outperformance by international mutual funds compared to the Indian markets.
So keeping in trend with investors hopping
on to the latest fad that has outperformed, aum for international mutual funds
has spiked up considerably.
As unhealthy as this trend may be, it is
here to stay considering recent returns trumps planning when it comes to most
retail investors and their portfolio creation.
What is an
international mutual fund?
An international mutual fund is any fund
that invests outside Indian markets.
This could be both, region specific or
theme specific.
International mutual funds can either
invest directly or in another fund, better known as fund of fund.
Their correlation with the Indian markets
would differ depending upon where you invest geographically.
The lower the correlation, the better for
diversification.
International mutual funds work as a very
good hedge against currency volatility.
Additional reading: Click Here to read Why you need a financial plan
Difference between
global and international mutual fund
An international mutual fund is one that
invests in specific countries or regions.
A global fund on the other hand is not
restricted by specific countries or regions.
A Europe based fund is an international
mutual fund since it invests only in Europe, a specific region.
A global brand fund or a global mining fund
is a global fund since it invests across the globe with no region restrictions.
Why are International mutual funds struggling?
Inflation
Post the 2008 financial crisis, central
banks across the globe have kept interest rates on the lower side to encourage
growth.
A very obvious side-effect of this approach
is the rise in inflation since easy liquidity fuels inflation.
Coupled with the Ukraine-Russia conflict
and the continued lockdown in China disrupting the global supply, rising rates
have added to inflation.
In March 2022, the US for example had its
highest inflation rate for around 40 years.
To counter the rising inflation, in May
2022, the Reserve Bank of India hiked the Repo rates by 40 basis points to
4.40%.
How
inflations impacts Equities
High inflation brings along with it higher
interest rates in order to tackle high inflation.
Higher interest rates means higher input
costs for businesses.
These higher costs are then passed on to
the end customer.
All of this leads to higher prices for the
end customer.
Demand therefore takes a hit which in turn
leads to slower economic growth.
Lower economic growth would mean pressure
on earnings growth of companies which therefore means moderate growth for the
companies.
Ukraine- Russia
Conflict & The China lockdown
Just as most of the world was coming back
to terms to some sort of normalcy, the Ukraine- Russia conflict has thrown a
spanner in the works.
China continues to struggle with containing
and therefore stricter lockdowns still prevail.
Both these situations have disrupted the
global supply chain.
Crude oil has touched new highs while there
are fears of an impending food scarcity.
The Ukraine-Russia conflict has completed
100 days and there are no signs of a ceasefire yet while the stricter lockdowns
in China too show no signs of receding.
Equity markets do not take a liking for
uncertainty.
|
Scheme |
1 yr Return |
|
Invesco Ind – Invesco Global
Consumer Trends FoF |
-38.85 % |
|
PGIM Ind – Emerging Markets |
-38.61 % |
|
Edelweiss Greater China |
-30.74 % |
|
PGIM Ind - Global
Opportunities |
-28.32 % |
|
HSBC Brazil |
-27.30 % |
Diversification
The biggest advantage of international
mutual funds is that they provide diversification.
They are very rarely the first fund of a
new investor or even take up the major portion of anyone’s portfolio.
They are usually an afterthought or take up
a very portion of a mutual fund portfolio.
They invest in companies and markets that
Indian based mutual funds do not.
Low Co-relation
International mutual funds have a very low
co-relation to Indian based mutual funds.
This stands true for global funds as well.
Due to a low co-relation, international
mutual funds provide diversification in the true sense.
More often than not investors invest in
various funds with the aim of diversification but end up unknowingly investing
in the same set of companies or strategy via different schemes.
Where most investors go wrong with
international mutual funds is in being unable to take advantage of the
diversification and low co-relation benefits of international mutual funds.
Most investors who seek diversification via
international mutual funds in reality end up investing either in US or a
regional fund like China or various thematic funds like tech, agriculture, etc.
This can be attested by surveying the AUM
of various international mutual fund schemes.
This defeats the very purpose of
diversification.
A global fund would make more sense or if
one is adamant about investing in a developed economy (considering India is a
developing economy) then a global developed market fund can also be looked at.
Understanding the market
Whatever international mutual fund you
pick, understanding the fund and its underlying strategy is very important.
This is true for an international mutual
fund as it is for an Indian based mutual fund.
Sadly far too many investors go about
choosing funds based on their recent returns with no understanding and end up
frequently entering and exiting funds.
This only adds to their charges with exit
loads and taxation.
You should not be investing in
international mutual funds merely because you can.
You should only if you have a plan and a
very good understanding of the fund and the underlying strategy of the fund.
Sadly many investors venture into
international mutual funds out of fear of missing out, that is not a good enough
reason to invest in international mutual funds.
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