June 06, 2013 / 10:41 IST
All global markets and assets do not necessarily move in tandem. Hence, there exists the possibility that losses in one place can be offset by gains elsewhere, thereby protecting the portfolio from extreme volatility. With the rupee weakening, the domestic markets being volatile, and several international markets doing well, an investment into global funds could hedge one’s portfolio against things going wrong in one market.
While most Indian investors diversify their portfolios by investing in different asset classes, some investors go one step ahead and invest in global markets. This geographical diversification helps in containing risk and protecting investor portfolios against concentrated exposure to a single market. Global funds also permit small investors to get a slice of the global markets, which otherwise would not have be possible given the smaller investment sizes.
There are several benefits from investing in a global fund including diversification. One of the biggest advantages of global funds is the reduction of geographic portfolio risk by diversifying into various funds globally. So if the Indian markets are not doing well, one could always invest in a market which is doing well, as most markets do not always move in tandem. Diversification lowers the inherent risk involved in a portfolio.
Another benefit from global funds is the growth potential. An investor can take advantage of regional growth across the world. If an investor is stuck to a particular market, he will not be able to make the most out of growth in other markets. However, one should always make sure that a lot of research is done on macro-economic factors in new markets before investing. It may also make sense to invest in a developing market for better returns.
It is also important to keep in mind the risks involved with investing in global funds, especially since such risk can be different from the investment risks in India.
Currency Risk: This is the most vital factor associated with global investing. Since one is investing in Indian Rupees which is then converted into the local currency prior to investment, there is always a currency risk. Currency appreciation or depreciation is dependent on the demand and supply mechanism as well as the policies framed by the Governments and their Central banks.
For example: A person invests Rs 10,000 in a U.S. oriented global fund which will be converted into U.S. $181.81 (assuming the rate is Rs/U.S.$ of 55.00 as on the date of investment) and will be invested in the U.S. Market for one year. Assuming 10% return, the value of your investment fetches a sum of US$ 199.99. Now while obtaining value in Indian rupee terms, assume the Indian rupee actually appreciates to Rs 52 against the U.S. dollar. In such a case the value of your investment of Rs 10,000 would fetch you Rs 10,400 - a gain of mere 4% in Indian rupees, as against the 10% gain, in dollar terms.
This is known as currency risk. This situation could be vice versa and gains could be magnified. So as the Indian rupee is weakening at the moment due to the high current account deficit (CAD) and other macroeconomic woes, it is good to go for international funds. However, if the macro-economic climate improves, the rupee could rise and it would adversely affect the returns from international funds.
Geopolitical Risk: One has to be well informed about the geopolitical environment as it influences the investment climate of that country. Geopolitical risk refers to the political situation of the country and the policies affecting the macro-economic conditions. For example, there are certain countries such as Iran where it is a political risk to invest in, while there are others like Australia where it is safer to invest.
Regulation Risk: The regulatory environment also acts as a deciding factor. Even if the country offers strong growth potential, if there are no good regulations in place to protect one’s investment, it is a risky investment. The liquidity of an investment and repatriation rules of a country are also important as it may have an impact on the performance of the scheme.
Lack of Information: It is easy to track a domestic fund. If it underperforms, the media will report it and you can keep track. However, keeping track of a foreign fund is more difficult.
It is advisable to invest in global funds that have a strong track record as far as returns are concerned. Factors like transparency in information sharing will also be useful to keep in mind.
Assuming global funds are considered for the purpose of diversification and asset allocation, even then only a small chunk of portfolio (10% to 25%) is to be invested. Typically, follow a systematic investment route i.e., begin with 10% exposure to gain an understanding of the new market (s) and raise it gradually up to 20% to 25%. The SIP route is beneficial because these funds are subject to dual volatility; including currency fluctuations. Hence, it is all the more important to use rupee cost averaging to smoothen out this volatility.
Summary:- Investment in global fund should be with the aim of diversification and growth.
- It provides a global perspective to ones portfolio. But one should invest in a global fund only after thorough research and comparison between various markets.
- Avoid the urge to rush into investing in a global fund because of the hype created.
