How to choose international mutual funds?

I want to invest in a global fund/US fund. What criteria should be there to select these funds and what should be the amount to invest in them? I'm a new investor, started my investment in February 2022. Thank you - Varun Sharma

A mutual fund that invests in companies located outside of the investor's country is referred to as an international mutual fund.

Indians may have relatives living abroad or children who want to pursue higher studies in a foreign country. This creates a possibility to plan and budget the expenses in a foreign currency. One may also invest early so that their children's education and expenditure are taken care of, or one may also be among those looking at avenues outside India for investment opportunities. Even though domestic investments have performed well, one can still look at international funds if they give a good return.

If you're one among them, here are some of the things you must look out for before you invest internationally.

Diversification
You should look at funds that are diversified across sectors and stocks. There's a reason you choose to invest in a mutual fund, and that reason must be the same when you invest in an international fund. Since we live in India, our incomes, expenses and assets are in India. This international investment must not be correlated with the Indian market, only then will we achieve meaningful diversification. This way, you can shield your portfolio from domestic events that can affect your returns.

Broad mandate
The fund should not have a narrow exposure to markets. Many times these funds do very well when they are invested in a thematic fund, a commodity or a specific part of a country. This narrow exposure is volatile and a good run can turn sour very quickly. So, you must look for funds that have a diversified portfolio and a broad mandate. If they invest narrowly, market swings can hurt the returns of your portfolio. Hence find a fund that delivers consistently over a long period and is based on a diversified portfolio. Here are some equity funds that invest internationally.

Rupee devaluation
One of the other advantages of investing internationally is the exchange rate. Currencies of international markets, especially the US Dollar, are getting stronger every passing year. The USD which was Rs 65 in 2017, is Rs 80 today. In five years, it compounded by nearly 4.24 per cent. The performance of the fund's return would add on top of it and provide a healthy profit. Investing in overseas stocks, particularly dollar-denominated ones, helps you convert the challenge of rupee depreciation into an investing opportunity to earn better returns.

Long term horizon
Like any other equity investment, you should invest with a long horizon in mind. If not, you will not reap many benefits. International funds are treated like non-equity-oriented funds. So when it comes to taxation as well, you must hold it longer than three years to get the indexation benefit.

In conclusion
Finally, while international investing has many benefits, it can backfire if you're looking at a short-term horizon. Many investors rush to the international markets because they have grown immensely in the last three years. This is a bad idea. As with any other investment, rushing into international funds just because their past one-year or three-year returns look good, can be damaging to your portfolio. Taking a strategic approach to owning international funds is your best bet.

Keep in mind

• The investment must be evaluated entirely on merit in terms of its potential and your understandability.
• Choose your international fund carefully, decide on a pre-set allocation to that fund (say 10 per cent of your equity allocation) and stick to it through thick and thin, with a minimum five-year horizon.
• You do not need a lot of international funds, one or two should be enough. A big investment is justified only if your portfolio size is very large.
• As with any equity investments, SIPs are always better than lump-sum investments.

Suggested read: International mutual funds get some breather

This article was originally published on October 20, 2022.