Why International Mutual Funds Need To Be A Part Of Your Portfolio.

Is your mutual fund portfolio truly diversified? Just investing in a bunch of different funds/sectors doesn’t cut it. When it comes to diversifying investments, most of us fall prey to the geography bias and end up having all our investments (Equity or otherwise) in our home country. We generally try and spread out investments across equity, real estate, and gold. But we don’t consider the pitfalls of investing too heavily in one single country. This may work perfectly well during times of high economic growth like India has seen over the last many years. However, with slower growth catching up, returns on stocks and mutual fund investments will start mirroring the economy.

International Mutual Funds

International Mutual Funds are a great way to diversify one’s holdings to include other high growth countries such as the U.S. and China. This can be the perfect hedge for a portfolio when the Indian economy slows down. And the best part? You can indirectly own companies like Amazon, Tesla, Alphabet, Facebook, Nike, and many others.

How to invest?

While it is possible to directly buy stocks of Internationally listed companies, this process generally involves higher costs and large minimum amounts. International Mutual Funds can be bought for as little as Rs. 5000. These are as easy to invest in as regular mutual funds that buy stocks of Indian companies. International Mutual funds either invest directly in stocks or funds of companies listed in other countries. You can invest online or through a mutual fund distributor.

Let’s take a look at some of the options available:

(Return percentages are as of 23rd January 2020. All returns are for the growth options of the fund)

Franklin India Feeder Franklin US Opportunities Fund

Primary country exposure: U.S.
3 yr Return: 19.5%
5 yr Return: 14.3%

Expense Ratio: 1.6%
Minimum Investment: Rs. 5000
Exit Load: 1% for redemption before 365 days
Major Holdings: This Fund invests in the Franklin US Opportunities Fund and not in individual stocks.

Edelweiss Greater China Equity Off-shore Fund

Primary country exposure: China
3 yr Return: 19.86%
5 yr Return: 12.42%
Expense Ratio: 0.54%
Minimum Investment: Rs. 5000
Exit Load: 1% for redemption before 365 days
Major Holdings: This Fund invests in JPMorgan Funds – JF Greater China Fund and not in individual stocks.

Nippon India US Opportunities Fund

Primary country exposure: U.S.
3 yr Return: 19.79%
5 yr Return: N/A

Expense Ratio: 1.75%
Minimum Investment: Rs. 5000
Exit Load: 1% for redemption before 365 days
Major Holdings: MasterCard, Iqvia, Microsoft, O Reilly Automotive, Facebook.

ICICI Prudential US Bluechip Equity Fund

Primary country exposure: U.S.
3 yr Return: 17.93%
5 yr Return: 15.43%

Expense Ratio: 1.78%
Minimum Investment: Rs. 5000
Exit Load: 1% for redemption before 30 days
Major Holdings: Amazon, Kellogg Company, Microchip Technology Inc, Altria Group, Nike.

Parag Parikh Long Term Equity Fund

Primary country exposure: India
3 yr Return: 15.23%
5 yr Return: 11.56%

Expense Ratio: 1.17%
Minimum Investment: Rs. 1000
Exit Load: 2% before 365 days. 1% between 366 and 730 days.
Major Holdings: Alphabet, HDFC Bank, Bajaj Holdings, Amazon, ICICI Bank.

Edelweiss Emerging Market Opportunities Equity Offshore Fund

Primary country exposure: Emerging Markets
3 yr Return: 13.51%
5 yr Return: 7.16%

Expense Ratio: 1.22%
Minimum Investment: Rs. 5000
Exit Load: 1% for redemption before 365 days
Major Holdings: This fund invests in JP Morgan Emerging Markets Opportunity Equity Offshore Fund.

Risks to Consider

While International Mutual Funds offer great options for diversification, there are a couple of risks to keep in mind.

Taxation

These funds are taxed differently than local funds because they do not invest 65% of their corpus in Indian equities. Except for Parag Parikh Long Term Equity Fund, the above funds fall in this category. They are taxed as follows:

Investments held for less than 3 years: Gains are taxed at slab rate. Investments held for more than 3 years: 20% Tax with the benefits of inflation indexation.

Currency Volatility

These funds are susceptible to big swings in the currency. While some funds hedge this risk, it still is a factor in the final return percent.

Bottom Line

Having a portion of your investments in international mutual funds is a great way to insulate your portfolio from an economic downturn in India. And it’s great to indirectly own stock in companies like Facebook, Amazon, Apple, Nike, etc. whose products/services we are regular users of.

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