What are international funds?
International funds are schemes which invest in equities of a region, country or fixed income securities of companies located anywhere outside of the investor’s residence. Offshore funds or foreign funds are also called international funds. They, however, differ from global funds which seek equity to invest in companies from any country in the world.
As an investor, if you are seeking to diversify your risk and take advantage of the global markets, international funds may well be your answer. When investing overseas, developed markets offer you lesser risk because they have the world’s most advanced economies whereas emerging markets offer high returns with significant risk because the infrastructure and economy of these countries have a volatile growth. Underdeveloped countries have the highest risk with the potential for great returns. There are no subcategories of international funds but they are broadly country-specific, commodity-based or thematic international funds. The theme in an international fund can be consumption, energy, real estate or agriculture.
The returns on these funds would depend on the performance of the market they are investing and the currency movement. Retail investors are sometimes not able to factor in currency rates fluctuations in global markets.
What are the advantages and risks?
The advantage here for an investor is there are many businesses which are not listed in India. So if you want to be a part of the growth story of such companies, you can choose international funds that allow you to diversify across geographies. Sometimes if a certain economy does not perform, other markets may give you higher returns on your portfolio.This comes with certain risks like currency risk, political risk and liquidity risk. The currency risk here would be the value of the underlying currencies which can boost returns when the dollar is weak and have the opposite effect when the dollar is strong. Political risk means the government’s instability or other unforeseen troubles in the domain of a foreign country you are investing in. The US stock market is fairly liquid where a large volume of stocks is bought each trading day and international funds do stand a liquidity risk. While there are risks and some investors fear the unknown, international equity makes up a large part of the world’s market potential investment growth. Having said that, if you are a conservative investor you can pick a developed market and if you are willing to take some risk, you can choose the developing markets to grow your wealth.