International Mutual Funds: Returns And Risks

As an investor, you may have parked your money in domestic mutual funds. But wouldn’t you also like to be a part of the growth story of such international companies as Tesla, Amazon or Google? If so, you can invest in international mutual funds that will not only help you reap rich rewards but also expand your portfolio in a way that provides for hedging during market downturns. The article explains the nittygritty of investing in international mutual funds while also outlining the risks involved 

In recent months, a noticeable trend has emerged in the global equity markets. Western equity indices are outperforming their emerging market counterparts. All the three major US indices have reached record highs, while the Indian equity market is trading about 10 per cent below its recent peak. This shift comes after a period when the Indian equity market led the performance charts among global indices. Over the one-year period ending September 2024, the Indian equity market was one of the top performers globally. However, it has recently lost momentum and is now trailing behind. Following the recent bout of selling pressure, the Indian equity market has become one of the weakest performers among the major markets. [EasyDNNnews:PaidContentStart]

The equity market trends are clearly reflected in the performance of mutual fund schemes focused on these themes. For instance, Large-Cap funds have declined by an average of 5 per cent over the last three months ending November 14, 2024. In contrast, international funds have delivered returns of approximately 9 per cent over the same period. 

The following table shows the top international funds based on the last one-year returns. We may find that many a times the scenario is dominated by a few select themes. In the last one year, it is primarily US-based technology stocks that topped the chart. 

Seasoned investors are well aware that this is not an isolated occurrence. Cycles of underperformance and outperformance are a recurring phenomenon in the markets. The graph below illustrates this pattern, highlighting the phases of outperformance and underperformance between international equities, represented by the MSCI World index and the Indian equities represented by the MSCI India index. 

The above analysis makes it evident that incorporating international funds into your portfolio is essential for a better investing experience. A well-diversified portfolio that spans multiple asset classes and regions helps reduce the overall risk. Relying solely on investments in a single country exposes you to significant country-specific risks. To achieve comprehensive diversification, spreading investments globally—preferably through mutual funds—is a prudent strategy. This article delves into investing in the mutual fund category that is dedicated to international equity, its benefits, and how it can positively impact your portfolio by enhancing diversification. But before we do that, let us understand what international funds are. 

Invest Globally, Reap Globally
Globalisation touches every part of our lives—think of brands like Google, Amazon, Facebook, and Reebok that we interact with daily. While many of these giants are headquartered in the US, their reach is truly global. For Indian investors, international funds open the door to invest in such global leaders. By investing in these companies, you benefit from their worldwide presence and growth, which isn’t confined to a single market. This way, you can share in the gains driven by their global success stories. 

What are International Funds?
International funds are mutual fund schemes that invest in the securities of foreign companies listed in the global markets. These funds can adopt various structures, including direct investment in the global markets, using a feeder route to invest in an existing international fund, or following a fund of funds (FoF) approach by investing in multiple funds to gain international exposure. According to the Association of Mutual Funds in India (AMFI), international funds primarily invest in equities, debt instruments or commodities traded on stock exchanges outside India. 

These funds offer Indian investors the opportunity to diversify their portfolios geographically and tap into global growth opportunities. As of October 2024, international funds in India had assets under management (AUM) of approximately ₹55,364 crore across 68 schemes. While this figure might seem small compared to the mutual fund industry’s total AUM of ₹68.5 lakh crore and ₹30.38 lakh crore managed by equityfocused funds, the growth trajectory of international funds has been remarkable. Since January 2020, when their AUM stood at just ₹4,220 crore, these funds have grown 13.2 times, reflecting their increasing popularity among Indian investors. 

This growth underscores the principle of diversification— spreading investments across various assets. International funds allow investors to diversify across economies and currencies while participating in the growth potential of foreign companies—all from the comfort of investing in India. One common misconception is that international funds are limited to US’ stocks. However, this is not the case. These funds can invest in any market outside India, including countries like Vietnam, Nepal and Sri Lanka. International funds are not restricted to specific regions and can provide exposure to a truly global investment landscape. 

Different Kinds of International Funds
There are in total 68 funds that have different approaches toward global investing. It can be anything such as investing in companies of specific or different regions, countries and themes. 

Thematic International Funds - Most of the times, these funds invest in a specific theme and are sort of concentrated in nature. Say for instance, the DSP World Mining Fund invests in companies such as Rio Tinto Plc, Bhp Group Plc and Barrick Gold Corp which are specifically into mining. Similarly, Aditya Birla Sun Life Global Excellence Equity Fund invests in Julius Baer Global Excellence Equity Fund, an equity fund investing primarily in US stocks with technology (27 per cent), healthcare (17.2 per cent) and consumer cyclicals (11.7 per cent) as its largest sectoral allocations. 

Region and Country-Specific International Funds - As the name suggests, these funds tend to diversify geographically into different countries and regions. Here the objective of these schemes is to primarily discover the opportunities in different regions and countries. To give you an example, Edelweiss Greater China Equity Off-Shore Fund primarily invests in a diversified portfolio of companies that are domiciled in or carrying out the main part of their economic activity in Greater China region. Motilal Oswal Nasdaq 100 FOF and Motilal Oswal Nasdaq 100 Exchange Traded Fund (ETF) invest in the Nasdaq 100 index, which includes 100 largest non-financial companies based on market capitalisation in the US and listed on the Nasdaq stock exchange. 

International Funds with Exposure to Global Markets - These kinds of international funds broadly diversify their assets across the globe. For instance, 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. 

Reasons for Investing in International Funds
When you invest in international funds, apart from diversification and risk hedging, these funds are subject to economic cycles. This means spreading your investments across economies can potentially help you earn smoother returns. 

World Markets Don’t Move in Tandem - An analysis of global equity indices over time reveals that the global markets rarely move in sync. The recent divergence in equity market performance underscores this reality. Equity indices seldom maintain top performance consistently over different market cycles. This variability applies equally to funds focused solely on domestic markets, which may underperform sometimes while others outperform, highlighting the importance of a well-diversified mutual fund portfolio. 

To illustrate this point, we analysed the performance of 23 equity indices across various geographies and economies from 2015 to November 18, 2024. The data shows that it is rare for an equity index to retain the top spot for two consecutive years (Table: Annual Performance of Global Equity Markets). This variation arises as regional markets respond differently to local and global events. For instance, while the corona virustriggered pandemic disrupted the markets worldwide in 2020, the Nasdaq index defied the trend. 

In fact, during that period, Nasdaq delivered an impressive return of nearly 44 per cent due to the outperformance of technology companies. Diversifying investments across multiple indices rather than focusing on a single country can significantly reduce portfolio volatility. For example, in 2019, a portfolio equally distributed across these 23 indices yielded an average return of 21.45 per cent, outperforming India’s Nifty 500 index, which generated a modest 8.44 per cent return. 

Similarly, in 2018, when the global markets were broadly negative, the diversified portfolio experienced a decline of only 9.69 per cent, cushioning the impact compared to the doubledigit losses seen in many individual markets. This analysis highlights the advantage of global diversification in mitigating risks and stabilising returns. Just as diversification across sectors and market capitalisations within India enhances portfolio resilience, spreading investments across geographies provides a similar benefit, ensuring a more stable and balanced investment experience. 

Investing in international funds diversifies your portfolio beyond borders, tapping into global growth opportunities. It reduces dependency on domestic markets, hedges against currency fluctuations, and offers exposure to innovative industries worldwide. Broaden your horizons and let your investments benefit from the world's leading economies and emerging markets alike. 

Annual Performance of Global Equity Markets 

Low Correlation - In investing, a low correlation means different asset types didn’t perform in the same way. This becomes useful while investing globally because when the performance of investments in a particular country surge, the returns in other countries either decline less or might gain as well. In order to understand correlation between the markets, we analysed the weekly data of the 23 global equity indices that were covered in the above table titled Performance of Global Equity Markets. The period of study spanned from November 2014 to November 2024. 

The table above highlights the low correlation between the global equity indices. A correlation coefficient between 0.8 and 1.0 indicates high correlation, while a value below 0.5 signifies low correlation. Some indices exhibit strong correlation due to geographic or economic similarities. For instance, the Euro Stoxx 50 index (Europe) and CAC 40 index (France) show a high correlation of 0.95, as both represent similar regions. Conversely, indices like the MOEX Russia and Jakarta Composite index of Indonesia have a very low correlation of 0.03, indicating near-opposite movements. Negative correlation implies that the market returns move in opposite directions, whereas positive correlation means the markets trend in the same direction. 

Historical data demonstrates this divergence. For example, during the 2008 global financial crisis, the S & P BSE Sensex plunged 52 per cent, the DJIA fell 34 per cent, and the Hang Seng dropped 42 per cent. Similarly, in 2011, while the S & P BSE Sensex declined by nearly 25 per cent, the DJIA gained 5 per cent, and the Hang Seng fell 18 per cent. These differences underscore the importance of diversifying investments across countries. By spreading investments globally, investors can benefit from reduced portfolio volatility and minimise the risks associated with localised market downturns. 

Open Up a World of Opportunities
Investing in global mutual funds opens the door to growth trends and opportunities that may be underdeveloped or unavailable in the domestic market. By diversifying across regions, you gain access to industries, technologies and sectors positioned for significant growth in specific global markets. This approach not only expands your investment options but also mitigates risks associated with a single country’s economic slowdown or market volatility. 

Consider the semiconductor industry, which underpins advancements in artificial intelligence (AI), the Internet of Things (IoT), and cloud computing. While the United States has major players in this space, countries like Taiwan (home to TSMC) and South Korea (home to Samsung Electronics) dominate global semiconductor manufacturing. Investing in global mutual funds with exposure to these regions ensures participation in this crucial growth sector. Similarly, the electric vehicle (EV) revolution is another compelling case for global diversification. 

While the US and Europe are witnessing rapid EV adoption, China leads in EV production and innovation, with companies like BYD and CATL spearheading advancements in battery technology. A domestic-only portfolio may miss out on these transformative opportunities. By aligning your portfolio with global growth engines through international mutual funds, you position yourself to benefit from long-term trends across diverse markets, independent of domestic economic conditions. This strategy also provides a buffer against local market downturns, fostering a more balanced and resilient investment approach. 

Explore the Wide Investment Options
Global mutual funds offer the flexibility to explore markets that may present more attractive valuations compared to the domestic markets. This expanded universe of investment opportunities allows for strategic portfolio construction, enabling you to target regions or sectors with robust growth potential or undervalued assets. For example, the Chinese equity market recently saw a sharp surge of nearly 40 per cent in just one month. 

This growth was driven by attractive valuations, government stimulus and central bank policies that boosted investor confidence. By investing globally, you broaden your investment horizon, allowing you to identify and capitalise on the best opportunities worldwide. This approach reduces concentration risks and enhances the potential for superior portfolio returns by leveraging the undervalued markets and sectors poised for growth. 

Risks Involved in International Fund Investing
Though the upside of investing internationally is welladvocated, one should also be aware of the risk factors too. No investment is risk-free. We have listed below a few pertinent risk elements while investing in international funds that you should know. 

1. Expense Ratio
While investing in international funds, where most of them are FoFs, one should understand the fact that you end up paying at least twice the fund management cost. One part goes to the Indian asset management company (AMC) managing the fund here and the other goes to the scheme(s) in which the fund is eventually investing. Though the expense ratio is within its applicable range in India, the brokerage and fund management charges in the foreign fund will also be applicable. This is something which might be difficult for you to get details of. 

2. Economic and Political Risk
When you invest in other countries, there are economic and political risks that are specific to those countries where you have such exposure. Therefore, it is important to track key information and developments, which is not easily accessible to every investor. Even liquidity in international funds can be another such factor that needs to be considered, especially in schemes that invest in a specific theme. 

3. Currency Volatility
Though the advantage of a stronger dollar against the rupee is evident, you need to factor in the possibility of some currencies falling against the rupee. This is because the funds you invest in may convert the rupee into different currencies depending on the type of fund you invest in. Hence, any sort of currency fluctuations could impact the gains you may have made in such funds. However, you as an investor may hardly sense the impact of currency exchange rates because your investments are in rupees and you view the performance of the fund in the same currency. Currency exchange fluctuations do work in the background, which kick off as the investment undergoes multiple currency conversion and losses on exchange rates along with the applicable charges. 

Who Should Invest in International Funds?
International funds are an excellent choice for investors seeking to diversify their portfolios and tap into growth opportunities unavailable in their domestic markets. These funds provide exposure to global industries and trends, such as electric vehicles, semiconductors and renewable energy, which may be more advanced in regions like the US, Europe or Asia. By investing in international funds, you can reduce the risk of being overly reliant on the performance of a single economy and hedge against local market downturns. 

For instance, while India has its own growth drivers, accessing US’ technology giants or European industrial innovators can significantly enhance portfolio returns over time. These funds are particularly suited for long-term investors with a higher risk appetite, as they can weather the short-term volatility often associated with the foreign markets. Additionally, they are ideal for individuals with specific financial goals, such as saving for a child’s overseas education or hedging against currency depreciation. 

By investing in markets with stronger currencies like the US dollar or euro, you can protect your savings from potential erosion due to domestic currency fluctuations. Whether you are an experienced investor looking to explore niche sectors or someone planning for future foreign expenses, international funds can play a critical role in achieving financial goals while offering access to the global economy. Moreover, investing in staggered manner via a systematic investment plan (SIP) would be an ideal way of having exposure to international funds. 

The optimal allocation to international funds in your portfolio depends on several factors, including your risk tolerance, investment horizon and financial goals. Generally, a 10-15 per cent allocation to international equities is a good starting point for most investors. However, this can vary depending on individual circumstances. For instance, aggressive investors with a higher risk tolerance may consider a larger allocation, while conservative investors may opt for a smaller allocation.

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