Financial Planning

Systematic investment plan (SIP) is a disciplined and effective approach to create long-term wealth by investing small amounts on a regular basis. Not only do SIPs help you attain your various financial goals but this approach also ensures you have asset allocation in place to generate risk-adjusted and inflation-beating returns. By diversifying your investments across different asset classes, shares or geographical markets it adds a certain degree of safety to your invested money. Currently, the majority of investors invest in SIPs which are benefiting from India’s growth story. One may also consider starting SIP in international funds to add further diversification in portfolios.

What are International Funds?

International funds are the mutual fund schemes of a country which invest in companies, indices and securities of other countries. This essentially means that investors in India can invest in companies of other countries through international funds. Investment in international funds is a rising trend in recent years among investors who seek diversification in their portfolio and do not want to be limited by investing in domestic companies.

So what makes SIP in international funds attractive for investors? To begin with, one needs to understand that the equity markets of all countries do not perform in line. There are times when the disparity in performance of stocks and indices of countries is large for a variety of reasons. It could be possible that when the domestic markets are in a buoyant cycle, the markets of other countries may have corrected steeply. Similarly, the opposite could also be the case. Therefore, investors may consider investing in outside markets through mutual funds to make the most of the falling market of other countries.

Let's consider the example of the US-based NASDAQ index. The index has recently corrected significantly by 32 per cent which is much higher than the Indian small and Mid-Cap stocks. Moreover, the NASDAQ is still trading nearly 19 per cent lower against the high it made in November last year. Hence, it offers a massive opportunity for investors to invest and benefit in the long-term.

Benefits of Investing in International Funds

a) Geographical Diversification: Investment in international funds helps you increase your geographical spread in the portfolio. In other words, you will have exposure to markets outside of your country which will take risk mitigation strategy in your investment one notch up. Thus, your risks and returns are spread across more than one country’s stocks which prove to be a better risk management approach.

b) Asset Allocation: Asset allocation is a key for wealth generation. Your investments which are concentrated in one country get the opportunity of allocation to another country’s financial assets. This helps an investor get the benefits of various financial markets as you stand to win from diversified exposure.

c) New Investment Themes: Since foreign markets are more developed than ours and offer various themes and business opportunities currently not available in India, international funds tend to make investors truly international when it comes to their investment portfolios. Therefore, Indian investors do not feel being left out from accessing the benefits of the international investment trends.

d) Hedges Currency Risk: Investments in international funds’ tracking indices like NASDAQ offers a hedge for depreciating Indian rupee against the US dollar – considered a safe haven. Most investors do not give much heed to currency risks. However, it needs to be highlighted that currency risk management is very important when it comes to investments. In short, investment in international funds helps you get the benefit of rupee depreciating. As things stand today, Indian currency has steeply depreciated against USD at a level of 80. Investors who invested in international funds when the rupee was at 70 against USD are sitting on sizeable gains rising out of this exchange rate movement.

e) Cost Averaging: As any SIP would do, a systematic investment in international funds helps you average out the costs during the course of investment. This averaging positively impacts your long-term returns to create wealth.

f) Double-Digit CAGR: Given the robust performance track record of NASDAQ index, investors benefit in the long term. When observed historically, investors who invested and stayed put for five years have seen a CAGR of 12.74 per cent. Given the recent fall in the index, the risk to reward ratio is in favour of long-term investors.

The writer is Director, Bigbucks Financial Services Pvt. Ltd • Email : vipul@bigfin.in / bigfin.pune@gmail.com • Website: https://www.bigfin.in