International Funds : Are They Worth Exploring?

Recently, interest in international funds was rejuvenated when US company Nvidia Corp created windfall gains for its investors. Against this backdrop, the article investigates whether investing in international funds is truly one of the ways to create wealth. It also examines the risks associated with this path of investing.

On May 30, Nvidia Corp, a company listed in the US, achieved a significant milestone by joining the prestigious group of US firms with a market capitalisation of USD 1 trillion. This achievement can be attributed to the tremendous growth in Nvidia Corp’s share price, which has tripled in less than eight months. The surge in interest in artificial intelligence (AI), particularly in generative AI, has played a major role in driving the company’s success. While many Indian investors may have missed out on this appreciation, a few investors who had invested in the Mirae Asset FANG+ETF might have reaped the benefits. [EasyDNNnews:PaidContentStart]

This ETF has delivered an impressive return of 60 per cent year-to-date, with Nvidia Corp now constituting 12.26 per cent of its assets as at the end of May. This is just one example of the overall outperformance of international funds, which are consistently surpassing other equity categories in terms of returns.

The year-to-date performance of various mutual fund categories indicates that international funds have exhibited superior performance. International funds have delivered a remarkable return of 13.23 per cent during this period, outperforming other categories. The superior performance within the international funds category can primarily be attributed to specific funds that are dedicated to NASDAQ 100. While not all international funds have performed equally well, it is noteworthy that leading funds that predominantly focus on investments in US’ technology companies have performed well.
 

These funds have capitalised on the exceptional growth and success of the NASDAQ 100 index, which comprises top-tier technology giants. On the other hand, if you had invested in schemes that have made investments in Hang Seng or Greater China, you would have lost money. For example, Mirae Asset Hang Seng Technology ETF FoF lost around 8.03 per cent on a year-to-date basis while Edelweiss Greater China Equity Offshore Direct Plan has fallen by 2.5 per cent.
 

Out of 66 international schemes that are in the market, almost 50 per cent of them have offered double-digit returns in this year till date. Only 11 funds have generated negative return in the same time period. Aditya Birla SL CEF-Global Agriculture Fund remains one of the worst performers and has lost 13.81 per cent in this year till date.
 

The graph alongside unmistakably illustrates the impressive resurgence of international funds in the year 2023, following a period of negative returns in 2022. Moreover, the returns achieved in 2019 and 2021 stand out as the highest average calendar year returns recorded by this fund category in the past 13 years. However, it is crucial to avoid succumbing to recency bias when making investment decisions solely based on recent returns. Instead, adopting a comprehensive perspective is more prudent before committing to any specific fund. The subsequent paragraphs aim to provide a deeper understanding of international mutual funds, their various types, and whether they currently present a favourable investment opportunity. 
 

Defining International Funds

International funds are mutual fund schemes designed to invest in securities of foreign companies listed in foreign markets. These funds can be categorised into three broad types. Firstly, they may directly invest in the global markets. Alternatively, they can utilise a feeder route to invest in an existing global fund. Lastly, they may adopt a fund of funds (FoF) approach by investing in multiple funds to achieve international exposure.

As of May 2023, the assets under management (AUM) of international funds amounted to approximately Rs 12,345 crore across 66 schemes. While this figure may seem relatively small compared to the overall AUM of the mutual fund industry, which stands at Rs 43,20,468 crore, international funds have been steadily gaining prominence in individual portfolios since their introduction in the Indian mutual fund space. This trend aligns with the principle of diversification, emphasising the importance of spreading investments across various assets and geographies. Investing in international funds allows for diversification across different economies and currencies, providing investors with a stake in the potential growth of foreign companies, while residing in India.

Thematic International Funds

These funds typically invest in a specific theme and are concentrated in nature. For example, the DSP World Mining Fund invests in companies such as Rio Tinto Plc, BHP Group Plc and Barrick Gold Corporation, which are all in the mining industry. Similarly, the Aditya Birla Sun Life Global Real Estate Fund invests in companies that operate in the real estate industry around the world. These funds can offer investors the opportunity to gain exposure to a specific sector or industry without having to select individual stocks. They can also provide diversification benefits, as they are not as sensitive to changes in the overall market as a broad-based fund.

Geography-Specific International Funds

Geographic diversification funds invest in a variety of companies from different countries and regions. This type of fund can help investors reduce their risk by spreading their money across a wider range of markets. For example, the Edelweiss Greater China Equity Offshore Fund invests in companies that are domiciled in or carry out the main part of their economic activity in Greater China. This includes mainland China, Hong Kong, Macau and Taiwan. The Motilal Oswal Nasdaq 100 FoF and Motilal Oswal NASDAQ 100 ETF invest in the NASDAQ 100 index, which includes 100 of the largest and listed non-financial companies based on market capitalisation in the United States.
 

Presence in Global Markets

These kind of international funds broadly diversify their assets across the globe. For example, ICICI Prudential Global Stable Equity Fund (FoF) invests globally. Even Sundaram Global Brand Fund is one such fund that invests in companies across the world with no geographical barriers.
 

Investment Advantages

Investing in international funds offers more than just diversification and risk hedging. It provides exposure to different economic cycles. By spreading your investments across various economies, you have the potential to earn smoother returns. One of the key advantages of international funds is the access they provide to global markets. In today’s globalised world, our daily lives are influenced by products and services from companies that are not based in India or listed on Indian exchanges. Companies like Google, Amazon, Facebook and Reebok are just a few examples.

With international funds, Indian investors have the opportunity to not only experience these products and services but also invest in the companies behind them. Investing in global companies allows you to benefit from their widespread presence and operations. The growth prospects of such companies are not confined to a single country or market. By investing in them through international funds, you can participate in the gains and success they achieve across the globe. This global exposure opens up new opportunities and potential for investment returns beyond the boundaries of any single country or region.
 

Movement of World Markets

Looking at the historical performance of global indices, it becomes evident that world markets exhibit a lack of strong correlation. Even domestic indices struggle to maintain consistent top performance over time and across different market cycles. This highlights the importance of maintaining a well-diversified mutual fund portfolio investing in different geographies. To gain a deeper understanding, we have analysed the performance of top nine equity indices representing the US, Japan, Brazil, China, the UK, India, Canada, Germany and France from 2011 to 2022. Our analysis reveals that none of these market indices managed to retain the top spot for two consecutive years.
 

This observation underscores the fact that regional markets perform differently due to a combination of local and global events. The corona virus pandemic, for instance, impacted global markets in 2020, but the degree of decline varied across the equity indices of each country. By equally investing across these six indices representing diverse geographies, the overall portfolio would have experienced less impact compared to holding a country-specific portfolio. For example, in 2019, the average return from these nine indices was 22 per cent, which was lower than the top-performing Dow Jones Industrial Average (DJIA) that year.
 

Similarly, in 2018, when the global markets were facing significant challenges, a diversified portfolio would have experienced a decline of only 8 per cent, providing some cushioning against the volatility and double-digit negative returns in the global markets. This highlights the advantages of diversifying a portfolio across different geographies. Such diversification proves beneficial for the overall portfolio, just as diversifying across sectors and market caps is advantageous when investing in India.
 

Low Correlation

In the realm of investing, a low correlation between asset types signifies that they tend to perform differently from one another. This characteristic presents a valuable opportunity for diversification, as investing in assets with low correlation can help balance and safeguard your portfolio. This concept becomes particularly relevant when investing globally, as different countries and regions can experience varying performance trends. During times when investments in a specific country face a decline, other geographies may exhibit better performance, thereby assisting in maintaining the overall portfolio performance.

To gain insights into the correlation among markets, we conducted an analysis using daily returns data from the same six global indices mentioned in the previous table. The study spanned from 2010 to 2022, providing a comprehensive understanding of the correlation dynamics among these markets.
 

The table clearly illustrates the presence of low correlation among the global indices. A correlation value ranging from 0.75 to 1.0 signifies a high degree of correlation, while a value below 0.8 indicates a not so strong correlation. Among the indices listed, only Germany and United Kingdom exhibit a correlation of 0.93, indicating a relatively strong correlation. However, it is important to note that low correlation should not be confused with negative correlation, nor should high correlation be mistaken for positive correlation. Negative correlation refers to market returns moving in opposite directions, while positive correlation implies markets moving in the same direction.

To exemplify this, let’s examine the year 2008, which witnessed a global financial market crash. During this period, the S and P BSE Sensex experienced a significant decline of 52 per cent, while the DJIA dropped by 34 per cent and the Hang Seng fell by 42 per cent. Similarly, in 2011, the S and P BSE Sensex registered a decline of approximately 25 per cent while the DJIA recorded a 5 per cent gain and the Hang Seng declined by 18 per cent. From this data, it appears that there is a low correlation between the most of the global indices and the Indian index based on daily returns data.

Risk Factors in International Fund

Investments While investing in international funds offers numerous advantages, it is crucial to be aware of the associated risk factors. Every investment carries some level of risk, and when investing in international funds there are several pertinent risk elements to consider. Below are a few key risk factors to be mindful of:

1. Expense Ratio: Investing in international funds often involves fund of fund (FoF) structures, which means you end up paying fund management costs twice. One portion goes to the Indian asset management company (AMC) managing the fund domestically, while the other goes to the scheme(s) in which the fund eventually invests abroad. Along with the applicable expense ratio in India, brokerage and fund management charges in the foreign fund also apply. Although these details may be challenging to obtain, they can impact your overall returns.

2. Economic and Political Risk: Investing in foreign countries exposes you to specific economic and political risks associated with those countries. It is important to stay informed about key information and developments that may impact your investments as such information may not be readily accessible to every investor. Additionally, liquidity in international funds, especially those investing in specific themes, should be considered as another potential risk factor.

3. Currency Volatility: While a stronger dollar against the rupee can be advantageous, it is essential to account for the possibility of certain currencies depreciating against the rupee. International funds convert the invested rupees into different currencies depending on the fund type, and any currency fluctuations can impact the gains made in such funds. However, as an investor, you may not directly perceive the impact of currency exchange rates since your investments are in rupees and you evaluate the fund’s performance in the same currency. Currency exchange fluctuations occur in the background during multiple currency conversions, potentially leading to losses on exchange rates along with applicable charges.

By being aware of these risk factors, investors can make more informed decisions and take appropriate measures to mitigate potential risks when investing in international funds. 


 

Aptitude for International Funds

The risks associated with international funds make them unsuitable for all investors. Investing in international funds depends on the specific investment goals of individuals. Therefore, international funds are more appropriate for investors looking to create wealth and diversify their portfolios. For those planning for their child’s education abroad, exposure to country-specific international funds related to the destination country can be beneficial. Similarly, individuals with goals of international vacations can consider investing in international funds.

However, it is advisable for other investors to avoid investing in international funds as it may not serve their purposes. It is important for investors in international funds to have a long-term investment horizon of at least five to seven years. Additionally, investing through a systematic investment plan (SIP) in international funds is an ideal approach to gain exposure. In summary, the suitability of international funds depends on investors’ specific objectives, and they should carefully consider their investment horizon, goals and risk tolerance before venturing into international fund investments. 

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