As portfolio compositions of domestic equity MFs are confined to the stocks of Indian companies only, investing in foreign companies through international MFs will ensure additional diversification.
One of the benefits of choosing mutual funds (MF) over direct equities is the in-built diversification of the MF portfolio. To diversify in direct equities, one has to invest a lot to buy even a single stock of different companies.
The diversified portfolios of equity MF schemes available with the Asset Management Companies (AMCs) in India, however, consist of stocks of Indian companies only. So, for further diversification, investors may consider buying the stocks of companies situated outside India as well.
Why International MFs
There are many reasons to invest in international MF schemes. Some of them are –
Higher Diversification
As portfolio compositions of domestic equity MFs are confined to the stocks of Indian companies only, investing in foreign companies through international MFs will ensure additional diversification.
Moreover, with little or no influence of domestic issues like economic activities, fluctuations in domestic markets etc on foreign stocks, an international MF would provide more stability to an investor’s portfolio.
Tackling Rupee Devaluation
As foreign companies transact in foreign currencies of respective countries, earnings of such companies are not affected by valuation in the Indian Rupee.
So, in case of devaluation in the Indian currency, returns generated by foreign companies would magnify when converted to INR and vice versa.
How to choose a fund
As the aim of having an international fund in the portfolio is to achieve greater geographical diversification, an investor needs to check the portfolios carefully to choose a fund.
Not Country Specific
An international fund should be truly international and shouldn’t have companies of a single country in one’s portfolio. Otherwise, it will defeat the basic purpose of achieving geographical diversification.
Not Sectoral or Thematic
Investors need to ensure that the international fund they are choosing is a well-diversified fund and is not investing in companies of a specific sector or on the basis of a specific theme.
While investing, the investors need to know that the international funds are taxed as debt funds, as only domestic stocks enjoy the benefit of equity taxation.
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