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July 27, 2018

Diversify your portfolio geographically via international funds

Extending the frontiers of financial investing, India-registered mutual fund houses offer a plethora of international funds to invest in. Domestic investors can choose from active and passive funds with exposure to developed and emerging markets, and across country-, region- or commodity-specific themes. International funds not only provide benefits of investing in foreign financial markets, but also help diversify a portfolio geographically. This article looks at the pros and cons of geographical diversification and the international scheme options available to Indian investors.


The pros


Diversification is the key to successful investing. By investing across different asset classes - equities, debt and gold - investors can mitigate the risk of depending on any one asset. That is one way. Another way to diversify is to invest across geographies. The historical trend in Table 1 shows that different markets performed differently at different points of time, thereby allowing investors to benefit from regional diversification.


Many flavours


Mutual funds offer international exposure to different structures. While many of these include fund of funds and funds investing directly in foreign equities, some fund houses also offer passively managed exchange-traded funds (ETFs). Investors can diversify their investments in global markets in many ways. For instance, investors can invest in developed and emerging markets, in a single country-focused fund (the US, Japan, China, Brazil, Hong Kong, etc.), a regional (Europe, Asia) or a global fund. There are also other options available including theme-based international funds such as consumer, commodities, etc. The variety enables Indian investors to enjoy the benefits of geographical diversification by reducing their risks and improving returns. For instance, investors can mitigate their risks by investing in a stable and large global economy, which potentially offers high returns. On the other hand, they can participate in the high growth potential of an emerging economy other than India.