As the world becomes increasingly interconnected, geographical boundaries are becoming insignificant. The same holds true for investments. Investors in India are no longer limited to domestic markets. International mutual funds have opened up endless possibilities, offering diversified portfolios and the potential for higher returns.
Adding international funds to your portfolio can give you an opportunity to share the growth of foreign companies and boost your investments. But at the same time, it needs careful consideration of many factors, such as whether to invest in well-established markets or emerging economies. After all, the stakes are high, and every investor’s priority is to maximise returns while minimising risks.
On that note, here are 4 key factors that can help you select the best international funds to step up your mutual fund portfolio.
1. Choose a market that has lower correlation with the Indian market
When two markets have high correlation, they tend to move in the same direction, either up or down, at the same time. However, when there is a low correlation between two markets, they tend to move differently.
For example, if India’s stock market has a high correlation with a particular market, then the movements of both markets will be similar, either both will rise or fall simultaneously. But, by investing in a market that has a lower correlation with India, you can reduce your portfolio risk and benefit more from diversification. This is because these markets may not be affected by the same factors that impact the Indian market.
2. Checklist to evaluate your international fund investments
Keep the following checklist in mind to select the best mutual funds to invest in:
- Choose schemes that focus on countries with well-developed stock markets to reduce volatility and increase stability.
- Look for funds that invest in countries and markets with strong corporate governance to avoid downgrade and default risks.
- Prioritise funds that invest in countries with a good legal system to protect your investments from sudden business shutdowns or scams.
- Select mutual fund schemes focusing on strong businesses with long-term growth potential, even if they are investing in well-established markets like the USA.
3. Look at fund size and compare with other funds in the same category
Larger fund size indicates better stability, liquidity, a more diverse portfolio, and experienced management teams. But size is not the only factor to consider, as there are times when smaller funds perform better. So, evaluate other parameters such as the fund’s investment strategy, historical performance, and expense ratio, before making a decision.
4. Evaluate different types of international mutual funds to choose one
There are various types of international mutual funds, and each has its unique investment strategy, risk profile, and investment objectives that you must evaluate first.
For example, global funds offer diversification across the world, while global sector funds provide exposure to specific sectors or industries. Country funds invest in a particular country’s market, offering investors more focused exposure and while regional international funds give exposure to specific regions, like West Asia and South Asia.
So before allocating your capital, analyse each fund’s past performance, overall track record, variation of risk and return, and other crucial metrics.
Investing in international mutual funds can help you with diversification and growth, but it also comes with risks, such as currency risk, economic and political risks. To neutralise these risks, it is recommended to keep a portfolio exposure of 10-15% to international funds, have a longer time horizon of at least 3-5 years, and continuously monitor your investments.
As an investor, it can be tempting to time the market and make quick transactions. To stay disciplined and focused on your long-term investment approach, it is advisable to opt for systematic investment plans (SIP) when investing in international funds. This way, you can consistently invest, without being highly influenced by market fluctuations or emotional biases.