It is a well known fact that diversification helps to hedge risk in a portfolio. By investing in a range of assets across different sectors or classes, the risk associated with the portfolio greatly reduces. Typically, portfolio diversification could be across different sectors, across asset classes such as bonds & equities, or across regions such as domestic or global.
Global Diversification- What Does it Have in Store
Global diversification involves investing in markets outside the country. By diversifying in international markets, the risk in a portfolio reduces as different countries would have different risks and market sentiments. By investing in a range of countries, you could reduce country-specific risks. With the Reserve Bank of India permitting Indian investors to invest in global markets through mutual funds, various fund houses launched “Global Investment Funds” a few years back.
Basics of Global Funds
A Global Investment Fund is very similar to your regular equity mutual fund. It predominantly invests in stocks of international companies, apart from holding domestic stocks. The unique advantage of this fund is that it lets you invest in international stocks, without having to do any forex remittance or transaction. It gives your portfolio an exposure to multiple capital markets, all with a single investment.
What to watch out for
- Risks: Global funds face currency risk. The foreign exchange rate at the time of buying the units may not be the same as the rate on the date of redemption. This difference in foreign exchange rate is borne by the investor which may eat into the returns earned.
- Expenses: Apart from the entry and exit load charges, fund houses charge annual management and brokerage charges. Most of the Global Funds work as Fund of Funds, in other words they invest in foreign mutual funds which in turn are invest in international stocks. This could increase the fund expenses considerably.
- Tax Aspect: Global funds are not a very tax efficient investment option and are treated as a non-equity fund. There is a 10% (with indexation) or 20% (without indexation) long term capital gain tax, and a 30% short term capital gain tax on the gains made.
Global Funds- The Indian Scenario
The primary aim of Global Investment Funds is to take advantage of positive movements in the international capital markets. Though fund houses do offer an international exposure, this exposure is much lower than expected. Many a times, the percentage invested internationally is just around 20 to 25% of the fund assets. The balance is invested in domestic equity. Another trend among many fund houses is to predominantly invest in the Asian and Emerging market economies. Of course such funds do generate gains, but they surely don’t qualify as global funds but as Asian funds. In the above scenarios, the very basic idea of diversification in international markets, to generate returns and reduce risks, takes a hit.
A Final Word
A Global Investment Fund is not meant for risk averse investors. You should be prepared to face the element of risk it bears. Evaluate the option across different parameters before taking the plunge. It is important to understand the track record of the fund house. Also, as most Global Funds work as Fund of Funds, it is vital to evaluate the track record of the parent investment house too. Go in for the fund if you already have your core equity investment in tact and are additional international equity diversification.