Should you invest in Global Mutual Funds?
Global Mutual Funds give the opportunity to domestic investors to diversify their investments in international markets. Though the investment is done locally through a domestic mutual fund house, it gives you exposure to some of the biggest, top-performing companies around the world.
One of the biggest benefits of investing in a global fund is that you are able to counterbalance losses in one geographic area with profits from another. Your investment is not concentrated to one country or one geographical area; it is diversified across various markets to reap benefits from international trade developments.
Global funds help you in leveraging the strengths of different economies in the world while reducing country-specified risks. For instance, the US is an economic superpower and a diversified economy in its own right. Latin American countries are known for their strengths in the commodity sector while Asian countries come up tops in the service sector. The BRIC nations (Brazil, Russia, India and China) are fast-growing economies.
Fund managers invest in prosperous or potentially promising high growth companies in geographical areas that prove to have a significant advantage over the other.
Global funds are however, not with their share of risks. Apart from the performance of the funds, there is another factor that decides the money you will make off these funds – the performance of the local currency. So, in effect, your earnings from a global fund depend on the change in the share prices as well as the currency of the two nations. Let’s say you gain 12 percent through rise in Brazilian stocks but the local currency (Brazilian Real) depreciates by 12 percent against the Indian Rupee, then your profit is zero.
The falling value of rupee augurs well for global funds. But if the government controls the fall and the value of the home currency rises, then it can negatively impact the returns of the global fund.
Investing in global funds also requires in-depth knowledge of the markets around the world. Usually, one does have a fair idea of what is going in one’s home country because of the constant media barrage about the current political-economic scenario. But to study international markets, one may have to make a conscious effort to understand, analyze and keep track of economics in a foreign market, which is not that simple, even in today’s times of information being available at the fingertips.
Global funds can also be impacted by various natural disasters and man-made atrocities raging from earthquakes and tsunamis to riots and war-like situations. A negative political atmosphere can harm the financial atmosphere of the region and put a dent in the strategy of the fund manager. Of course, fund managers have a plan in place to allocate the funds only in economies and nations that prove to be a peaceful platform for business growth, but then the future holds no guarantees.
As far as taxation is concerned, global funds are treated like debt funds. Short-term gains which are lesser than three years, are taxed according to the existing income-tax slab of the investor. Long-term gains are taxed 10 percent without indexation and 20 percent with indexation. Indexation is the process of adjusting the buying price with inflation. This leads to a higher purchase prices and reduces the tax liability.
So should one invest in a global fund or not? Well, the fund may have its share of risks but the fact that it help you benefit from positive developments in international markets, makes it an attractive proposition. The best thing to do is to invest in a global fund through SIP (Systematic Investment Plan) so that you can benefit from rupee-cost averaging. The SIP route of investing in a global fund can protect you from dual volatility that may occur due to the unpredictable behavior of equity markets and currency rate fluctuations.
Begin by investing only 5 percent in a global fund and then move to 20 percent if you are confident about investing in global markets. Even out of that 20 percent, you should invest 10 percent in a developed market like the US and the remaining one in the emerging markets.