International Funds: Which Ones Should You Choose?

Are you looking to invest in foreign stocks? Do you want to diversify your portfolio beyond the Indian stock markets? You may consider investing in international funds that invest in foreign stocks. However, there are several international funds, and you must pick the right ones to attain your investment objectives. Which international funds should you choose?

What are international funds?

International funds invest in stocks of companies located outside India. You invest in rupees and the fund manager of the international fund purchases stocks of companies listed on foreign stock market exchanges. 

There are many types of international funds, such as thematic international funds, country-specific funds and global markets. Thematic international funds invest in foreign stocks based on a theme. However, country-specific funds invest in stocks of a particular country or region, and global funds invest globally. 

Which international funds should you choose?

You must invest in international funds to attain your investment goals based on your risk tolerance. For instance, global funds have different risk-reward levels depending on the country or region they invest their money in. 

You must invest in international funds only after building a well-diversified portfolio in Indian investments. Moreover, you must invest in US-based international funds as the US is a strong representative of developed economies. 

For instance, you could invest in a US-based international fund that tracks a US stock market index portfolio like the S&P 500. It helps as this stock index covers several top companies across market capitalisation in the USA. 

The US stock market had a low correlation with the Indian stock market of around 0.1-0.2 over the last 20 years. It presents an excellent opportunity to diversify your portfolio beyond Indian shores. 

If you are a market-savvy investor who understands international stock markets, you can invest in country-specific funds. You could expose your portfolio to funds that focus on Brazil, China, Japan, and European economies.

Should you try active or passive international mutual funds?

You could invest in international funds through the passive route if this is your first time in the foreign stock market. For instance, you could pick a US-based fund that tracks and replicates the portfolio of the S&P 500 or the Nasdaq-100. 

You can invest even in international funds that focus on emerging markets through the passive route. However, experts recommend sticking with US-based funds through the passive route. It helps as stock market indices such as S&P 500 and Nasdaq consistently outperform actively managed funds. 

How much should you allocate towards international funds?

You may consider allocating 10%-15% of your overall mutual fund portfolio towards international funds. However, you must allocate over 75% of your international funds’ portfolio towards US-based schemes.

You can allocate around 20%-25% of your international fund portfolio towards international funds that focus on emerging markets. It helps if you avoid international sectoral or thematic funds, focusing on only one sector or theme. 

You could select 1-2 international funds that match your risk profile to attain your long term financial goals. Moreover, you may avoid over diversifying your international portfolio with too many US-based or country-specific funds. In a nutshell, you must opt for active or passive international funds with exposure to the US economy if you are a novice investor in foreign stocks. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in