Indulging in international travel or global cuisine is an interesting way to not only discover new cultures but also discover new opportunities. Unless we see the world outside the boundaries of our own country, we do not know what exists there and how it may be beneficial for us. Just like international travel and cuisine, we seldom look beyond Indian shores when it comes to investing. Outside India, there are plenty of investing opportunities which are often missed, just because we haven’t explored the option. International investing is one of the best way in which one can not only get a chance to discover new investing opportunities but also get a chance to diversify their portfolio with a variety of investment options, which are likely to be missed when we do not look beyond domestic investing options.
What Are International Funds?
International Funds, also known as international mutual funds, are basically mutual funds which invest in companies which are located outside the investor’s country of residence. They are also known as foreign funds. International funds must not be confused with the term ‘global funds’, which include the entire world. There are two notable advantages which international funds have to offer to investors. Firstly, international funds provide investors with access to professional management. Secondly, given the fact that they invest in companies other than the investor’s country of residence, international funds allow investors to diversify their portfolio in an instant.
By investing in an international fund, investors get the chance to be a part of a much larger and far more diverse portfolio, which they could otherwise not have been able to consolidate by investing domestically. Further, to help investors manage their portfolio, investment decisions related to international funds are taken by experienced portfolio managers who have expertise in terms of management of funds in the international market. To further help investors in their investment decisions, fund management companies have research analyst teams located internationally to provide feedback.
Advantages of International Investing
International funds offer several advantages to investors, which can help them in a number of ways to accomplish their financial goals. Some of the most important advantages are as follows.
Diversification of Portfolio
A diverse portfolio is very important when it comes to investing. Any investment portfolio consists of a mix of high, medium and low risk investments. With a diverse portfolio, any risk associated with a single high risk investment is distributed and thereby reduced. Though a diverse portfolio will not remove all the risk associated with a certain investment, it can help smoothen the performance of the portfolio during times when the market is unstable or down.
Expertise of Professional Management
Most of the time, investors do not have the resources or the knowledge which is required for managing a diverse portfolio of investments. However, portfolio managers are in charge of managing mutual funds. They will track the holdings under the fund and will determine the sale or purchase of stocks.
Liquidity is one of the most important aspects of any investment. A liquid asset is a term used for assets whose shares can be exchanged for cash in a very short time period, ideally, within a business day or two. Once you have sold your share, you will receive the amount equal to your investment’s value at the time of the market closing. However, since the value of a fund is directly dependent on the prevailing market conditions and performance, the value which the investor will receive upon redemption may be above or below the original cost of the share.
Another important advantage of mutual funds is the convenience which they offer in terms of the administrative aspects of ownership of assets. All information related to your investment like account statements, tax status of capital gains, dividends received from the fund will all be sent to you via email for easy tracking and monitoring.
Types Of International Mutual Funds
Open-end mutual funds are the type of funds which have no restrictions in terms of the amount of shares which the fund can issue. These funds are like a collective investment scheme where the investor can buy shares directly from the fund instead of the existing shareholders. Open end funds form a majority in the mutual fund market and are popular in many countries. The issue price of an open-ended fund is a direct indication of the share’s performance as these funds are issued and redeemed on the basis of their net asset value (NAV). Open-ended funds are an easy yet valuable tool for investors looking to invest. A majority of open-ended funds are managed actively where the portfolio manager chooses the securities to be purchased. Once the fund has accumulated total assets which may not be easily manageable or may hamper the objective of the fund, the fund manager can decide to close the fund to new investors. In some cases, the fund may be closed to further investment even by existing fund investors.
Over the years, exchange traded funds have gradually earned their place as one of the preferred financial instruments which offer unique advantages as compared to mutual funds. Exchange-traded funds or ETFs is a kind of fund which is traded on the stock exchange. This fund consolidates other assets like bonds, stocks, commodities, etc., and distributes the ownership of the assets into shares. The primary goal of this fund is to yield high returns for its investors at a minimum cost. Exchange traded funds work in a way which is very similar to stocks. They carry several advantages like low cost, tax efficiency and the flexibility which is similar to a stock. The various types of exchange traded funds (ETFs) are Index ETFs, Stock ETFs, Bond ETFs, Commodity ETFs, Currency ETFs, Actively Managed ETFs, Inverse ETFs, Leveraged ETFs and exchange-traded grantor trusts.
One of the most common type of mutual fund are Equity Funds, also known as Stock funds. Equity funds comprise mainly of stock investments, and can be managed actively or passively. These funds are distinguished primarily on the basis of the size of the company, geography (international or domestic) and investment pattern of the holdings. They can be single-country funds, broad market funds or regional funds. Equity funds are an ideal investment option for investors who are not too familiar or adept at financial investing or those who are not in possession of a large amount of capital to invest. Two characteristics which make equity funds a wise option for small investors are that first, due to the diverse nature of the portfolio, it helps reduce the risk factor. Secondly, these funds require only a small amount as investment. The value of an Equity Fund is determined on the basis of its Net Asset Value (NAV), after deducting the value of liabilities.
Bond funds, also known as Debt Funds, are those funds which mainly invest in bonds and other debt instruments. Around 18% of mutual fund assets comprise of debt / bond funds, which offer several advantages like dedicated management of fund, portfolio diversification, easy liquidity and the convenience of automatic reinvestment of the income to add value to the fund. There are different types of bond funds available which are classified on the basis of their maturity. These are term funds – short term, medium term and long term. Municipal bond funds provide lower returns but carry lower risk and also provide tax advantages. High-yield bond funds deliver higher returns as they invest in corporate bonds, but also include higher risks.
Money market funds
Money market funds are types of mutual funds which have been introduced to allow investors to invest assets which are equivalent to cash and are easily accessible. These are low-risk and low return investments which comprise a total of 26% of the total mutual fund assets in the US. However, though these funds are low-risk & low return, yet, unlike certificates of deposit (CDs), investors can redeem money market shares at any time.Disclaimer
Mutual Fund investments will be subject to market risks. Any mutual fund listed in the document does not guarantee fund performance or its underlying creditworthiness. Do read the mutual fund document thoroughly before investing. Specific investment needs and other factors have to be taken into account while designing a mutual fund portfolio.
GST rate of 18% applicable for all financial services effective July 1, 2017.