When looking at all the international equity funds that are available to the Indian investor, a majority will look at investing in the US markets.
High returns over the last few years have prompted many investors to invest in international equity funds and because of this, we are now seeing a steady stream of new fund offers for investing in international markets. More choice is a good thing. However, here are a few points that every investor should keep in mind when looking at investing in international funds.
Cost structure
In the US markets, there has been a big shift in investing away from active mutual funds toward just investing in the underlying index. In India, SEBI had banned entry loads for investing in a mutual fund, the exit costs are low, and the expense ratio is capped by the regulation.
In contrast, US mutual funds can have upfront loads of around 5 percent to the retail investors, this can even go up to 8.5 percent! What’s more, the mutual funds also have exit loads or contingent deferred sales charges of 5 percent or more. This does not even include any transaction fees that the investor might incur for buying or selling the mutual fund. This is why any outperformance or alpha that these funds can generate is eaten up by the high fees they charge. This has fueled the rise of passive investing globally.
Fund-of-funds route
Many of the international mutual funds that are available for investment in India are structured as fund-of-funds, meaning that the domestic mutual fund scheme will invest in units of the international mutual fund. While the fee load for institutional plans is lower than the retail plans, an investor must take into account what is the cost structure of the fund net of everything because even the domestic fund house will charge its own expense ratio. Investors may find that any outperformance is not worth the high fees charged and therefore would be better off following the passive route that is practiced globally.
Diversifying beyond US stocks
When looking at all the international equity funds that are available to the Indian investor, a majority will look at investing in the US markets. It is important to keep in mind though that the last decade has seen a phenomenal bull market in US equities and within that high growth tech stocks. But all good things come to an end and it is prudent to diversify investments across multiple geographies and to get a broader exposure than to just the technology stocks.
Consider Assets under Management
Every mutual fund company looks at its own profitability. And therefore, mutual fund companies will find a scheme unviable below a certain level of assets under management. Investors don’t want to be surprised by a scheme being merged into a different one or for the investment objectives of the scheme to be changed. This defeats the purpose of their initial investment. Therefore, filtering out funds with low levels of assets under management is critical in addition to checking the fund rating, scheme performance, and management track record.
How to decide
It is tempting when seeing the high returns of US markets to put a sizeable allocation of investment to funds that invest there, but that might not be the most prudent strategy. Investing in international equities is not for everyone. After all, it is not just that there is equity risk that is being taken on, but also the currency risk and the risks related to different growth and inflation dynamics of other countries. Investors should be aware of how this affects the portfolio and allocate money on the basis of their risk tolerance.
