In recent years, international equity funds have become a popular addition to Indian investors’ portfolios. The reason is simple: they have numerous advantages over domestic funds.
When you invest in international funds, you diversify your portfolio geographically and stay safe from domestic market movements. International funds also promise high returns even if the value of the Indian Rupee decreases. And if you consider their performance over the past five years, their results are impressive, with over 75% of international funds outperforming NIFTY 50.
Do you think international funds are a good investment option for you? Here is a step-by-step guide to choosing the best international equity funds for your portfolio.
How do international funds work?
Before you start investing, you should know where your money will go when you invest it in an international equity fund.
The Securities Exchange Board of India (SEBI) defines international equity funds as schemes that invest 80% or more of their funds in equities or equity-linked assets in a foreign country.
Out of 44 international funds currently operating in India, 37 funds have a fund of funds (FoF) structure. They have a mutual fund available to Indian investors called the feeder fund. So, when you put money in an international fund, it goes to the feeder fund. The feeder fund then invests its money into another fund, called the underlying fund. Finally, this underlying fund invests in international markets.
In this structure, the manager of the feeder fund does not directly buy or sell the stocks of international companies. Instead, they purchase units of the underlying fund. The manager of the underlying fund manages the international investments.
How to select an international equity fund
Step 1: Look for funds with diversified portfolios
Just like domestic funds, make sure the portfolio of your chosen international fund is well-balanced. Avoid lopsided portfolios and sectoral thematic schemes like agriculture and mining.
Step 2: Choose your location carefully
Pick schemes that invest in countries with well-developed stock markets with good corporate governance and a robust legal system. By doing so, you will protect your money against sudden company shutdowns or scams.
You must also analyze how mutual funds in different countries are performing. For instance, schemes operating in Japanese markets have not yielded good results. Conversely, funds invested in the US, China, and emerging markets have shown high growth potential.
Step 3: Analyze the fund’s performance and look for consistency in returns
International funds choose different benchmarks, which they try to outperform. Thus, you will see a variation of returns among different schemes.
So, to compare them properly, you need to focus on the consistency of returns offered by the scheme over a period of time.
Additional things to consider
Before making your selection, note the following factors:
- The expense ratio of your fund.
- Style of investing- growth, value, or a blended approach.
- Market capitalization
- Fund management- active or passive
After following the above steps and weighing these factors, you will be able to select the best international equity funds for your portfolio.
The bottom line
While international equity funds have a lot of benefits to offer, make your investment decision carefully. By doing so, you will be able to minimize risk and achieve your financial goals.
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