Should You Have International Exposure in Your Investment Portfolio?

Do you want to invest in foreign companies? Are you looking to profit from foreign markets? You may consider investing in International funds. It puts your money in stocks of companies listed outside India. Your portfolio gets exposure to stock markets of a specific country or region. For instance, you can invest in International funds that put money only in US stocks. It helps diversify your portfolio beyond Indian shores. Should you have International exposure to your investment portfolio?

What are International mutual funds?

International mutual funds invest the bulk of their assets in equity and equity-related instruments listed on stock exchanges outside India. An international mutual fund manager could directly purchase foreign shares or put money in an existing global fund with a pre-designed portfolio consisting of foreign stocks. 

You could invest in International thematic funds that put your money in foreign stocks according to a particular theme. Moreover, you could invest in global funds that invest in a portfolio of stocks from across the world. It helps as if one of the stock markets doesn’t perform well, the other markets make up. 

Should you have international exposure in your investment portfolio?

You can invest in international funds for geographical diversification. It helps as the degree of correlation varies between stock markets of different countries. For instance, the Indian economy may be struggling when the US economy is doing well.

You could diversify a small portion of your portfolio with international funds to reduce country-specific risk. It could enhance your portfolio return when the Indian stock markets are on a downturn. 

Investing in international funds gives your portfolio exposure to stocks of global giants that are market leaders. It helps as these companies generally deliver superior returns to investors over some time. Moreover, you also get to invest in themes that are currently not available in India. 

You could invest in international funds if you seek investment opportunities in countries with a stronger currency than the Indian rupee. For instance, if the Indian rupee depreciates by 2% against the US dollar, a US-centric international fund enjoys a corresponding gain. However, you must stick with your investments for the long-term if you want higher returns in some time. 

You can invest in international funds if you plan to send your children abroad for higher education or build assets abroad. It helps as you would incur expenses in dollars, and you are protected against exchange rate fluctuations when you redeem your investment.

You could invest in International funds through a systematic investment plan or SIP. It helps you stagger your investment in foreign stocks and average your investment cost over some time. Moreover, you could invest in international funds through SIP with a long term horizon of over five years to achieve your financial goals. 

How to pick the right international fund?

You can select the right international fund depending on your time horizon, risk tolerance and investment objectives. For instance, you must invest in international funds if you are an aggressive investor who understands the foreign stock markets and the impact of currency fluctuation on your returns. 

You must study the International fund to understand where it invests your money. For instance, the fund you select may be investing in both Indian and foreign stocks. Moreover, some international funds invest in stocks of companies in emerging markets. It would help if you invested in international funds that match your investment objectives. 

Your investment in international funds is subject to both economic and political risk. For instance, an adverse change in the economic or political situation in the country or region where you invest through international funds will impact the returns from your investment. Moreover, you must also consider currency risk when you invest in international funds. For instance, if you invest in a US-centric international fund, your investment in rupees is converted into US dollars. It helps increase your returns if the Indian rupee depreciates against the US dollar. However, you could lose on the returns if the rupee appreciates against the US dollar.

It would help if you checked the expense ratio of the international fund. You must choose an international fund with a lower expense ratio. It is the cost of managing the fund. Moreover, international funds could be a fund of funds (FOF), where an Indian mutual fund invests in a foreign mutual fund. It increases the expense ratio as you incur higher expenses on your investment. 

It would help if you had exposure to international funds to diversify your portfolio beyond Indian shores. You must evaluate political, economic and currency risk along with the expense ratio before investing your money. You could have around 5%-10% of your portfolio allocation towards international funds. You must invest in international funds to attain financial goals based on your risk profile in a nutshell. 

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