Is Investing in International Funds a Good Idea?
The lure of investing abroad has always intrigued the Indian investor. With the Indian Rupee depreciating against the US Dollar in the last two years, the temptation to invest in international funds has increased. International funds are an option that investors explore when they want to diversify their portfolio across geographies.
What are International Funds?
Simply put, international funds are funds that comprise of investments made in foreign stocks and companies. They give investors an opportunity to tap into international markets whilst diversifying their portfolio beyond the Indian Stock Market. These funds expose the investors to Global Blue-chip companies like Apple, Amazon, Google, Facebook, etc. and help hedge against the depreciation of the Indian Rupee.
What are the risks involved with investing in International Funds?
International funds pose risks such as Currency Risk, Geopolitical Risk, Economic Risk, etc. These can adversely impact the value of the investments. As the international fund investments are made in a foreign currency, the investors are exposed to a currency exchange risk. Let’s illustrate this with an example.
When the Indian Rupee depreciates against the US Dollar, the investors’ returns on the US-focused funds will increase. Conversely, if the Indian Rupee appreciates against the US Dollar, the investors would make a loss. Therefore, investing to hedge against the depreciating Indian Rupee is not a good enough reason to invest in international funds. Predicting the currency movements is a highly complex skill that should be attempted only by experts and not by laypersons.
Geopolitical risks refer to country-specific risks, such as war, natural calamities, change in the government, etc. These situations are beyond anyone’s control and cannot always be foreseen. If the investors are well compensated, then it may be worthwhile taking on these risks.
How do International Funds compare to Indian Funds?
Let us look at the returns of top-performing international funds and compare them to the Indian Mutual Fund category average.
|Name of the Fund||3 year Returns||5 year Returns|
|ICICI Pru US Bluechip Equity Fund – G||13.70%||11.31%|
|DSP Blackrock US Flexible Equity Fund||12.99%||10.57%|
|Franklin India Feeder Franklin US Opportunities Fund||17.10%||13.60%|
|ICICI Pru Global Stable Equity Fund||4.99%||7.35%|
|Category Average||3 year Return||5 year Return||10 year Return|
|Equity – Large Cap||10.63%||11.67%||15.77%|
|Equity – Multi-Cap||14.47%||16.10%|
|Equity – Mid Cap||11.21%||16.26%||22.22%|
The numbers clearly indicate that the investors have not benefitted by taking on the risk. It may have been more prudent to diversify the portfolio across different categories of the Indian equity market instead of different geographies.
Investing in developed countries can earn well only when the Indian economy is expected to experience a long-term slowdown. As long as India’s economy displays the attributes of an emerging market, the Indian markets will perform better in comparison to developed economies.
(Views expressed above are the personal opinion of Amar Pandit, CFA, Founder, Happyness Factory)