All you need to know about Investing in Global funds

Every investor knows that diversification is essential to reduce portfolio risk. For diversification, you can invest in different stock categories, bonds, gold, etc. You can take a step further and invest in funds outside of India to add another layer of diversification. 

Until recently, investing in global funds was not easy, but today, you have options to invest in mutual funds. Hence, investors should consider this an investment option. But before you invest in it, it is crucial to learn everything about it.

Why should you invest in global funds?

We have already covered the first reason above - diversification. The second reason is that different world economies perform differently at the same. For example, in 2015, European stocks were one of the best-performing in the world. In the same year, Japan's major indices have outperformed and touched its highest levels in 15 years. However, in India, the situation was a bit gloomy for equity investors - errant monsoon, lower than expected corporate earnings, and volatile oil prices.

In 2016, at one point, the BSE Sensex was up by a mere 3.91%, and the Dow Jones Industrial Average Index was up by 15.24%. For this reason, having investments in different economies makes a lot of sense.

If we talk about the US market, it has consistently outperformed the Indian equity market.

Another reason to invest in global funds or stocks is that they give us the option to invest in companies we are familiar with (US-based). There is a saying that one should invest in companies whose business we understand and whose products we use. Listed companies in the US like Amazon, Apple, Google, Meta, etc satisfy this investment criterion.

The last reason is currency diversification. Let us talk specifically about US investment for this point. If you look at the recent trend in the rupee with respect to the dollar, the rupee has lost its value significantly. In 2010, the value of the rupee against the dollar was Rs 45. Today, it is touching the 80-level mark. There are numerous reasons for this depreciation; we will not go into details here.

However, you can use the depreciation of the rupee to your advantage when investing in international funds. When you buy a mutual fund, you get exposure to foreign currency by investing in rupees. If you had invested in a fund that has delivered 200% since 2010, you would have made an additional 78% on top of it because of rupee depreciation.

Things to consider before investing in global funds:

Below are things to know before investing in global funds:

The risk: Major risk when you invest in international funds is ignorance. Since you don't live in the country, any economic news from the land will travel to you a bit late. The other risks include currency risks and economic and political risks.

Don't invest for the short-term: Like any other investment, you will make the most of your global investments if you stay invested for a long time. Also, to keep your portfolio diversified, stay invested in international funds.

Know where the funds are investing: Different investment funds have different investment strategies to construct portfolios. You will find some funds labelled as international funds. However, they invest in Indian and foreign equities. Then there are funds that invest only in emerging markets. Before you invest in a global fund, you should check the investment strategies and where the funds get invested. It should be in line with your risk profile.

Check the cost of investing: If you buy stocks directly, you must know the remittance charges and other charges related to buying and selling stocks. If you are investing via mutual funds, check the expense ratio before you invest.

Diversification: Diversification is essential in your global fund portfolio as well. If you are investing via direct equity, ensure you are not putting all your money in one or two stocks. It is already taken care of with mutual funds and ETFs.

Taxation: Know how taxation works when you book your profits. It is a vital parameter to consider while checking the historical returns and computing net returns.

Before you get started

Investing in global funds may sound fascinating, especially with the opportunity to invest in companies like Facebook and Tesla. However, if you are new to investing, you should not directly jump to international funds. The first thing you need to do is build a well-diversified portfolio of Indian companies. Once you have a firm grip on Indian equities, you can move to international funds to give yourself a chance to get higher potential returns.

Depending on your risk profile, knowledge, and comfort level, you can choose to invest in the international market via direct equity, Exchange Traded Funds (ETFs), or mutual funds.

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