Investing in int'l markets as a route to diversification

Investments can go 'beyond borders'. Diversification can be taken to a further level by investing in international funds too. There is no need to limit our investments to Indian funds and asset classes. A perfect balance/diversification can be achieved by spreading the portfolio across international markets and asset classes. While gold funds are acknowledged to be a ‘hedge’, international funds can also help to do the same.

Apart from investing via the mutual fund route, one can also invest in indices of 24 major economies through Derivative investments. SEBI has given partial permission with reference to trading available only in Derivative products.

Type of Funds:
International funds are those that invest in equities of global markets. Basically there are two types of international funds. The first kind invests partially in international markets (20 to 25%) and remaining in Indian/Domestic market; funds like Fidelity International Opportunities Fund come under this segment. The other type invests completely in international markets i.e. 100% exposure to global funds; funds like Birla Sun life International Equity Funds come under this category.

Associated Risk:

Currency Risk: Considering that the investment is made oversees the immediate and the first risk which implies is the currency risk. Any movement in the exchange ratio can positively or negatively impact the investments in such funds.

Geographical Risk: Many funds invest only in one country whereas some invest in a group of countries. The investment is exposed to micro and the macro economic factors / risks that impact the ‘external’ economies. The 'risk' factor associated with such investments is a mixed bag. Any positive event on the macro/micro economic front can lead to growth in the value of investments.

Tax Treatment: International funds which invest at least 65% in Indian markets and the balance in global/international markets are considered as equity funds and hence short-term capital gains are taxed at 10% for these funds while long-term capital gains are tax free. And all remaining funds in this category are taxed like debt funds, where the long-term gains would be taxed at a flat rate of 10% without indexation or 20% with indexation. The short-term capital gains will be added to the investor's income and the same will be taxed as per the applicable income tax rates.

Benefits of Diversification:

• International exposure and benefit by diversification globally
• Hedge against domestic investment
• Risk/Return Set off during different market phases (i.e. Bull and Bear phase)

 

 

 

 

Source: - Crisil Research

Indices of developed markets have performed better as compared to the emerging market equities during the bear phase/downturn i.e. from 2008 and 2011 whereas indices of emerging market have outperformed during the bull phase. Hence, diversification of portfolio by investing in international funds help to reduce the risk and enhance returns during different market phases.

Benefits of Derivative Trading in Global Indices:

• This investment opportunity will open a new investment avenue for investors.
• Now even an individual investor can seek international exposure thus benefiting from global diversification.
• Ample flexibility as trading will happen during Indian market hours and the same shall be supervised by SEBI
• No problems with reference to currency conversion as trading will be conducted in Indian rupee

Fund Performance:

 

 

 

 

Key Takeaways:

• Diversification a must for every investor
• Diversification helps to enhance Risk Adjusted Returns
• Better Opportunity - During different market phases
• Assess the associated risks and one’s risk appetite for the same, before investing
• Evaluate the specific funds thoroughly before investments