Deepshikha | Mar 12, 2022 |
How to Choose International Equity Funds?
The majority of stock investors choose to put their money into domestic companies. Investors believe they have a better understanding of the local stock market, including its hazards. While this is correct, investors should be aware that investing solely in domestic equities exposes them to single-country risk, even if the country in question is their own. International equity accounts for a share of the assets held by investors in developed markets. Indian investors have recently expressed an interest in overseas shares.
Risk diversification is one of the most important advantages of investing in international shares. International equity, like domestic equity, fixed income, and commodities, is a distinct asset class. Each equities market is, in fact, a distinct asset class. Investing in foreign stock can help you diversify single-country risks, such as climate/weather risks, natural disaster risks, pandemic risks, geopolitical risks, and so on.
Currency risk is an element of your total portfolio, but it demands extra attention if you have financial goals that require you to spend in foreign currency, such as paying for your children’s school abroad or arranging a foreign trip. Currency risk can be mitigated by making international investments.
Banking, oil and gas, metals, cement, autos, power, conventional IT outsourcing, pharmaceuticals, and other traditional industry sectors dominate India’s stock market. Major technology developments such as the internet, social media, e-commerce, robotics and artificial intelligence, cloud computing and big data, solar technologies (photovoltaic cells), semiconductors, and electric cars can all be accessed through overseas investments.
As we’ve shown, having a percentage of your investment portfolio invested in international shares may be prudent. Investing in international shares can be done in a variety of ways. By opening an offshore trading account with an Indian broker who has a tie-up with an overseas broker, you can invest in international shares. Fintech platforms are also available that allow you to invest directly in overseas stocks. For resident Indians and NRIs, direct investments in international stocks are governed by RBI’s FEMA laws.
International equity mutual funds or fund of funds (FOFs) that invest in overseas stocks, ETFs, or mutual funds are excellent investment options for international equities for investors who do not have an understanding of international markets, industry sectors, or stocks. In addition to the ones that were formed earlier, several FOFs investing in international equities have been launched in the last few years. In this article, we’ll go through how to choose international equity funds.
To reap the benefits of diversity, the asset class in which you invest should have a low correlation with the other assets in your portfolio. To put it another way, when some assets in your portfolio perform poorly, others should outperform. Fortunately, there is no correlation of returns among large international markets, which is good for diversification. Choose a market with a low correlation of returns to the Indian market to get the most out of diversification.
Various international organisations have conducted country competitiveness studies. One of the most comprehensive and highly acknowledged studies is that conducted by the World Economic Forum (WEF). Markets are graded on each criterion, and composite rankings are provided to them after thorough analysis. You should invest your money into countries with a high competitiveness index. Strong competitiveness suggests a healthy industry ecosystem with promising future growth possibilities.
Due to their unique competitive advantages, position in the global supply chain, availability of raw materials and labour, easy access to major trade routes/shipping lanes, and research and development capabilities, some countries dominate certain industry sectors.
Countries that have maintained sector dominance for lengthy periods with government assistance and favourable policies have done so in the past. As a result, investing in nations with sector domination makes financial sense. If your current investment portfolio contains a sector in which an overseas market has a dominant position, you risk losing out on both diversification and wealth development opportunities. However, as previously stated, understanding overseas markets and sectors necessitate specialised knowledge, which local fund managers may lack. When investing in an international equity fund, make sure the Asset Management Company (AMC) has access to foreign market local expertise, either through their parent company’s resources (if the parent company is based outside of India) or through partnerships with local market asset management companies.
Investing in overseas shares might help you profit from the depreciation of the Indian Rupee (INR). The INR has lost roughly 45% of its value against the US dollar during the last ten years (USD). For the sake of instance, if you had invested in US equities, you could have made approximately 3% per year (on a CAGR basis) from INR depreciation alone. Several other international currencies, such as the CNY (Chinese Yuan Renminbi), the HKD (Hong Kong Dollar), the NTD (New Taiwan Dollar), and others, have appreciated greatly against the INR over suitably lengthy investment horizons. However, currency fluctuations should not be the only basis for overseas investing, as equity risks might be significantly greater than currency risks.
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