What are international mutual funds? Know the types benefits and more

Raise your hand if you subscribe to foreign service providers like Netflix, Amazon, Uber, Apple, etc. Most of us pay these foreign companies to watch their shows, purchase items or book cabs. In this scenario, you are actively contributing to the growth of these companies. Therefore, doesn’t it make sense to also participate in their earnings? If you have been wondering about the best way to invest in these companies and earn returns, international mutual funds can be a good choice for you. 

To answer the question of what are international funds in brief, these are investment vehicles that provide investors the opportunity to diversify their portfolios through investments in securities from foreign or global markets. As we proceed further, you will see that these funds allocate a significant portion of their assets to securities issued by companies or governments outside our home country.

Advantages of international fund are manifold and we will discuss them in detail in the latter part of the article. However, in brief, it allows investors to gain exposure to international markets and potentially benefit from the growth and performance of companies and economies around the world. It also provides access to a broader range of investment opportunities, enabling you to realise gains from sectors, industries, or regions that may be experiencing rapid growth or have specific investment themes.

Types of international funds can be classified as country or region-specific funds, thematic international funds and global funds. You will read more about the types in international funds later in the article and this will help you choose the best type for your requirements.

Now that you have a better idea of international mutual funds, let us head to the section on what are international funds, to cement your understanding.

What is an international mutual fund?

If you are already investing in domestic mutual funds, international mutual funds can be a step up for your portfolio. Investing in international mutual funds is no different than buying units of domestic funds – you invest in rupees and receive units of the international fund in return. The corpus thus pooled is invested in stocks listed on foreign exchanges, helping you participate in the growth of foreign economies. These investments can be done in two ways – direct purchase of foreign stocks or investment in existing global funds comprising foreign stocks. Akin to domestic funds, international mutual funds are also regulated by the Securities Exchange Board of India (SEBI).

Types of international mutual funds

International mutual funds function on the same base principal as domestic funds and, therefore, their variants are similar to what we see in the domestic market. Broadly, there are three major types of international mutual funds which you can invest in:

• Country or region-specific funds: These international funds focus on a particular region or country, for instance, USA, and invest their corpus in the shares of companies listed on the chosen country’s indexes. The idea behind these international mutual funds is to tap into the potential offered by these diverse geographic locations.
• Thematic International Funds: Such international mutual funds pick a specific theme or sector, for instance technology, and invest in global companies belonging to the sector. Such investments help you participate in global sectoral growth.
• Global Funds: These international funds avoid focusing on a specific region or country. Instead, they park their corpus in a portfolio consisting of stocks of global companies, across sectors. This helps them capitalise on the opportunities in different countries and earn solid returns.

Benefits of international fund investments

The biggest advantage of investing in international mutual funds is geographical diversification. This ensures that all your investments are not tied to a single region, thus enabling you to benefit from the growth of diverse economies. Further, your portfolio will also be stronger in the face of geopolitical unrest or volatility in your domestic market. Secondly, like discussed earlier, you get an opportunity to participate in the growth of the companies you support, like Netflix, Uber, etc. Finally, you can also benefit from currency diversification and protect your portfolio when the rupee falls against international currencies. The depreciating rupee can act in your favour as an appreciation in dollar value will boost your returns.

Things to keep in mind before investing

By now, you have gained optimal clarity on what are international funds, types of international funds and advantages of international fund. While the answer to what are international funds and advantages of international fund helped you realise why you should invest in these vehicles, here are some things you should keep in mind, before deciding to park your corpus in the various types of international funds –

Firstly, understanding the foreign markets is crucial as each country comes with its economic, political, and regulatory dynamics that can significantly impact investment returns. Conduct thorough research on the countries in which the fund invests to assess their stability, growth prospects, and potential risks. Currency risk is another significant consideration because fluctuations in exchange rates can impact returns when converting foreign investments back to your home currency.

Additionally, the fund's strategy and approach must align with your investment goals. Some international funds focus on specific regions or sectors, while others offer broader global exposure. Evaluate the fund's holdings, allocation, and historical performance to ensure it matches your risk tolerance and objectives. Finally, tax implications also warrant attention so decode how foreign dividends and capital gains will be taxed in your home country to accurately gauge the impact on your returns. 

Who should invest in international mutual funds?

If you have a well-diversified domestic portfolio, it is time for you to set your sights on foreign shores and offshore funds. You should invest in international funds if you wish to participate in the growth of foreign economies or build exposure to global companies. This is also a great avenue if you are looking to diversify your portfolio geographically. Long-term investors should also invest in international mutual funds as there is tremendous scope for growth in the years ahead.

Have you been biding your time to invest in international mutual funds? Now that you know all the important aspects of the equation, it is advisable that you strike when the iron is hot and build positions in the countries you are bullish on. 

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