Here, in this article, we will discuss How To Invest In International Mutual Funds?
When We Invest In Mutual Funds Of India, We Know Very Well What We Are Doing Large Cap Funds, Mid Cap, Flexi Cap, Expense Structure, Portfolio Of Companies And Many More. Funds Still Seem Like A Black Box And There Are Many Questions That Consumers Are Ignoring Despite The Increasing Interest In These Funds.
In This Article, We Will Open The Black Box Named International Mutual Funds. To-Do This We Will Do An In-Depth Analysis Of All The Available International Funds, And Understand How These Funds Are Structured, What Is Their Actual Expense Ratio. Who Are These Funds? Which Countries Do They Invest In, What Is Their Investment Style And In The End, We Will Know How To Invest In These International Funds?
What Is International Mutual Fund?
SEBI Definition For An International Equity Fund Is A Fund In Which More Than 80% Of The Assets Of A Scheme Are Invested In Equity Or Equity Linked Assets Of A Foreign Country. By This Definition, Currently, There Are 44 Different International Funds Which Manage More Than 15,000 Crores In Assets But People Feel That The Definition Of 80% Of The Assets Of The Scheme In A Foreign Country Is Too Broad And This Category There Needs To Be A Better Way To Understand. And That Is Why Our Research Team Worked To Understand Each Of These 44 Schemes And Break Them Down Into Practical Areas. So Let’s Start With Our First Area Of Study, Namely The Structure Of These International Funds.
Structures Of International Mutual Funds
We All Have Heard About In-House And Outsourcing. Generally, Mutual Fund Companies Manage Their Funds Internally. Which Means AMC Employs A Fund Manager Who Actively Takes The Buying And Selling Decisions Of Stocks, Bonds, And Other Asset Classes But When It Comes To Managing International Funds, A Lot Of It Is Actually Outsourced. It Happens. When We Look At The Universe Of 44 International Funds, Indian AMCs Themselves Manage Only 7 Funds While The Remaining 37 Funds Are Managed Under A Fund Of Funds Structure.
Fund Of Funds Or FOF Is A Mutual Fund That Invests In Other Mutual Fund Schemes, For Example, The Recently Launched SBI International Access US Equity Fund Invests Money Collected From Indian Investors In Amundi US Pioneer Fund And Then Amundi Fund Invests This Money In Companies Around The World. Similarly, Many Other AMCs Follow The FOF Structure For Example DSP Invests In Blackrock Funds Edelweiss Invests In JP Morgan Funds Axis Invests In Schroders, And Aditya Birla AMC Invests In Julius Baer Funds.
If The Parent Companies Of Fund Houses Like Franklin, Invesco, PGIM, Principal, And HSBC Are International, They Have To Remain Aligned With Their Foreign Companies. And Then There Are Some Other AMCs Like Motilal Oswal And Sundaram Which Operate Their Own International Funds Which Are Domiciled Overseas So There Are Many Variations In Which These International Funds Are Set-Up. But In The Case Of International Funds, Such A Feeder Fund Set-Up Has Several Advantages And One Of The Major Advantages Is That It Gives Indian Investors Access To Investment Professionals Who Better Understand The Overseas Market And Your Investments. You Can Manage Money Better.
However, We Need To Understand One More Important Thing And It Is Related To The Expense Structure Of These FOF Schemes. Here There Are Two Funds Feeder Fund Which Is An Indian Mutual Fund Scheme In Which We Invest And Then There Is The Underlying Fund, Which Is Foreign Funds Are Where The Money Is Ultimately Invested. Which Means, Feeder Fund And Underlying Fund, Both These Funds Have Expenses That The Investor Has To Pay. As Per The September 2018 SEBI Circular, All Fund Of Funds That Invest In Actively Managed Equity Funds Can Charge Up To 2.25% As a Total Expense Ratio Which Includes Underlying Fund Expenses.
Since This 2.25% Is For Regular Funds So We Can Assume That An Average International Mutual Fund Scheme Direct Plan Will Have A Maximum Of 1.5 To 1.6%. The Table Shown Here Represents The Expense Ratio Of Some Schemes. Note Here That The International Funds Offered By Franklin And Invesco Are Showing Much Lower Expense Ratios As Compared To DSP And Edelweiss.
But What Appears To Be Happening May Actually Be Something Else. This Difference In Expense Ratio Has More To Do With A Non-Standardized Reporting Practice Where Some Fund Houses Report Expenses Of The Underlying Scheme In The Expense Ratio. As Investors, Understanding This Can Be Quite Complicated And Confusing. For Example, In the Case Of Franklin And Invesco Schemes, We Had To Go Through The Relevant Clause In Their Factsheet. Except Which Means That Only The Expense Ratio Of Indian Schemes Has Been Mentioned By Invesco In Its Fact Sheet.
But It Was Also Good To See That Fund Houses As DSP And Edelweiss Had Clearly Shown That The Expense Ratio Included The Expenses Of The Underlying Fund. In Fact, Both of These AMCs Have Gone A Step Ahead Of The Rest And Also Informed About The Fees Charged By The Underlying Scheme. Our Research Team Has Prepared A Comprehensive Worksheet Which You Can Download From The Link Given In The Description Of This Video. Can. This Can Help You Remove The Complexity And Ambiguity Associated With The Expense Ratio.
This Worksheet Will Not Only Give You A List Of All Available International Funds, But Will Also Give You The Structure Of Each Fund, The Name Of The Underlying Scheme, The Latest Expense Ratio, Whether The Expense Ratio Includes The Expenses Of The Underlying Fund And The Fund’s Investment Style And Portfolio. Will Also Give A Lot Of Information So Download This Worksheet And If You Like This Video Of Ours So Far Then Don’t Forget To Subscribe To ETMONEY Youtube Channel And Share This Video With Your Friends And Colleagues On Facebook, Whatsapp, And Other Social Media Platforms Share On
Investing In Specific Geographies
International Mutual Funds Today Offer Many Options Depending On The Geographical Location. If We Look From East To West Then There Are Special Funds To Invest In Japan, China, ASEAN Countries, Europe, Brazil, And USA. But If You Don’t Want To Choose Any Particular Country For Investment. Then You Can Opt For Funds That Need To Be Invested Globally. When It Comes To Global Funds, The Most Popular Benchmarks Used By These All-Countries Funds Are MSCI World Index, MSCI All Countries World Index, And S&P Global Index.
There Are 10 International Funds That Use These Global Indices As Their Benchmarks. Now As We Had Known In Our Previous Videos On This Channel. Globally The Most Used Valuation Tool Is PE Ratio PE Ratio Works As A Very Useful Guide For Everyday Investors. And That’s Why Since Then We Have Compiled The Previous And Next PE Ratios Of These Global Indexes. Note Here That The PE Ratio Of The S&P Global 1200 Index Is Quite Different From That Of The MSCI Index.. Which Indicates That Many Of These Benchmarks Follow Different Stock Selection Methodologies. This Also Affects The Performance Of Those International Funds. It Is Visible When They Want To Leave These Benchmarks Behind.
In Addition To Global Funds, There Are Many Regional Funds That Participate In Emerging Markets, European Markets And Invest In ASEAN Countries, Asia, And The Asia Pacific Region. There Are Also Country Funds Specifically Related To China, Brazil, And Japan That Indian Investors Can Access Through International Funds But The United States Remains The Most Popular Investment Destination And I Say This Because You Can Do A Little On Your Part. Use Caution Because While Some International Funds May Describe Themselves As A Global Fund, It Is Not Unusual For A Lot Of Their Investments To Go To The United States.
For Example Aditya Birla Sun Life Global Excellence Equity Fund Which Is A Global Fund.. Presently 79% Of Its Assets Are Invested In United States. When It Comes To The United States Being A Highly Developed Financial Market, There Are Several Benchmarks To Choose From. And Every Benchmark Has Investment Variance. For Example, The NASDAQ 100 Is Just Three Sectors – Technology, Consumer Discretionary, And Communication And If You Are Wondering What Is The Function Of A Sector is Like Consumer Discretionary In The NASDAQ Index. And This Is Largely Due To The Misconception That The NASDAQ Only Has Software Companies. In Fact Pepsico, Walgreens, Marriott International In The NASDAQ 100
And Some Popular Non-Technology Brands Such As Mondelez, The Owner Of The Cadbury Chocolate Brand. But If One Looks Beyond The NASDAQ To The S&P 500, One Will Find Much More Diversification, Such As Healthcare, Media, Aerospace, And Consumer Non-Durables, In Addition To Technology As Part Of The Index. Similarly, The Dow Jones Industrial Average And The Russell Universe Of Stock Have Different Compositions And Are Often Used By Funds That Are Domiciled In The United States. So Overall, International Investment Does Not Mean Investing In The United States Alone. There Are Many Options For The Indian Consumer And If You Make The Right Choice, It Is Most Likely That Your International Funds Will Complete Your Entire Mutual Fund Portfolio.
Different Styles Of Investing
In International Funds, We Can Choose From A Variety Of Investment Styles, Apart From The Geographic Location Of Where Your Money Is Going. It Can Be Divided Into 4 Different Parts. First, The Theme Or Sector You Want To Invest In. Our Research Shows That Out Of Our 44 Fund Universe, 25 Funds Are Very Diversified In Their Investing Style And Invest In Multiple Sectors. In The Remaining 19 Funds, You Can Choose A Limited Sector, For Example, You Can Choose A Fund That Caters To Agriculture And Agri-Business, Basically, There Are 2 Funds Under This Theme And Then Energy Fund, Gold Mining There Are Other Thematic Funds Like Funds, Technology Funds, Real Estate, Consumer Trends, And Even Climate Change Funds. There Is One International Multi-Asset Fund That Investors Can Subscribe To, And That Is The DSP Global Allocation Fund.
Now There May Be A Strange Problem With These International Funds. That Is, The Name Of The Fund And What Is In Its Portfolio Can Be Quite Different From Each Other For Example PGIM India Global Equity Opportunities Fund May Look Like A Global Diversified Fund But When We Go Deeper Into This Looking At The Portfolio Of The Scheme, We Come To Know That At Present About 80% Of Its Assets Are In Only Two Sectors – Technology And Consumer Cyclical. The Second Thing That Needs To Be Taken Care Of With Respect To The Investment Style Is Whether This Fund Is A Fundraiser. Is It A Growth Fund Or A Value Fund? Our Research Shows That There Are 17 Funds That Follow A Growth Style Of Investment. There Are 7 Funds That Follow A Value Approach And Then There Are 16 Mixed Funds That Follow A Moderate Growth Style And A Low-Value Style. Follow Up.
So If You Prefer Growth Style Or Value Style Or Mixed Style Of Investment. You Have Several Options To Choose From, And We’ve Also Highlighted The Investing Style In The Worksheet I’m Telling You About Over And Over Again. Market Capitalization Is The Third Thing You Should Consider. Now This Is An Area Where There Are Not Many Options And Most Of The International Funds Available To Indian Investors Want To Stay Invested In Large Cap Companies.
In Fact, Barring A Few Themed Funds, We Have Found Only One International Fund I.E. Principal Global Opportunities Fund Which Has A Small-Cap Bias And Actually Uses MSCI All Country World Small Cap Index As Its Benchmark And Finally The Fourth Thing To Consider Is Whether The Fund Is Actively Managed Or Is It A Passive Fund. Out Of These 44 International Funds, Only 3 Funds Are Passively Managed I.E. Index-Based Funds And Rest 41 Funds Are Actively Managed Now That We Have Covered Various Types Of International Mutual Funds. So Let’s See How We Can Devise A Fund Selection Process So That You Can Invest In Such Funds In The Best Possible Way.
How To Invest In International Funds
There Is No Doubt That Investing In International Mutual Funds Is A Must And This Trend Is Rapidly Increasing Among Investors. These Funds Have Several Advantages Which Include Diversification, Weak Correlation With The Indian Market, Increasing Returns On Account Of Currency Depreciation And Some Interesting Investment Ideas That Are Generally Not Available In Domestic Equity Funds From The Performance Perspective. Nearly 75% Of International Funds Have Outperformed Nifty 50 In 5 Years. So Now The Big Question Is, What Are The Ways In Which An Investor Can Filter And Choose A Suitable International Mutual Fund?
Now There Is No Straight Formula Or Definite Answer To This But The Suggestion Is That You Have To Follow Much of The Same Approach When Choosing International Funds As You Do When Choosing Domestic Equity Funds. So, Your Strategy Should Be Something Like This Step 1 Is That You Have To Identify The Sub-Category Of International Funds That Would Be Best For You Which Means If It Was A Domestic Equity Fund, We Would Choose A Sectoral Fund. Instead, You Might Look At Multicap, Flexicap, Or Large Cap Funds.
If We Follow This Approach, One Would Prefer A Diversified Large Cap International Fund Over Thematic Funds Like Mining Or Agriculture Funds. The Second Step In Our Fund Selection Process Is Related To The Location Of Japanese, European, And Brazilian Funds. Did Not Perform Well In The Past And There Is Not Much News Of Investing From These Segments. This Means We Have US, China, Emerging Market Or Global Funds To Choose From. Once Again No Preference Is Being Given Here But If You Are Not Sure Then Perhaps Opting For Global Funds Will Give You More Diversity And Stability. The Third Criterion For Choosing A Fund Is Its Performance.
Now, One Needs To Be A Little Careful While Comparing International Funds On The Basis Of Performance As It Can Easily Go Wrong. For Example, The Top Three Performing Funds Of 2020 Are PGIM India Global Opportunities Fund Motilal Oswal Nasdaq100 Fund And Edelweis Greater China Fund But From The Construction Point Of View, These Three Funds Belong To Different Markets. One Is A Global Fund, The Other Is A US-Based Fund, While The Third Is A China-focused Fund. When We Look At The Performance, We Should Look At The Fund’s Consistency And Compare The Fund’s Performance With The Benchmark. To Help You With This, The Worksheet Gives The Annual Performance For The Last 8 Years Of Direct Plans Of All International Funds.
Now We Believe That If One Follows The Above Mentioned Three Steps Along With Our Worksheet Then He/She Should Get 2 Or 3 Preferred International Funds To Invest In. Our Last Suggestion For You Is That You Should Keep On Using Systematic Insurance Plans Or SIPs, Just Like You Usually Do With Home Equity. And With This, We Have Come To The End Of This Writing. If You Liked This Article, Do Share It With Your Friends And Acquaintances On WhatsApp, Facebook, And Twitter. And If You Want To Ask Any Question From Us Then You Can Write It In Below Comment Box. Thanks For Taking Out Your Valuable Time.