How to invest in Global Companies via Mutual Funds?
What is Global investment?
Global investment is a type of investment through which investors can invest in companies which are located anywhere across the world. By investing globally, investors can become share owners of top-rated companies. For example - Microsoft stocks are not listed in Indian stock exchanges, but Indian investors can invest in Microsoft through global investing. Global investment can be done through stocks, bonds, mutual funds etc. Investors who prefer to invest in global companies via mutual funds can pour their money in two ways:
- Global mutual funds
- International mutual funds
What do we understand by global mutual funds?
Global mutual funds invest in companies which are spanned across the world. These funds provide an opportunity to invest beyond investor’s domestic market. For example: Assume an investor is residing in India. For him, foreign/international firms would be the firms located outside India. Right? Global means across the world. This implies that investors can invest in international companies across the universe including his domestic market.
Is global mutual fund same as international mutual fund?
The answer is a clear No. An international mutual fund invests in corporations across the globe excluding its domestic market.
For example: ICICI US Prudential Blue Chip Equity Fund invests in companies which are listed only on New York stock exchange/NASDAQ.
To get a better understanding, please have a look on the below table:
| Basis | Global mutual funds | International Mutual funds |
|---|---|---|
| Investment Universe | Across the world | Across the world |
| Does it invest in home country | Yes | No, it does not invest in its own country |
Categories of Global Mutual Funds
Physiography based funds: These are country/region/geography-based funds which invests in some region.
Who should choose? Those who want to invest in some country/region in order to reap gains from the growth potential of that country can invest in regional based funds. Before investing in any country one should do a rigorous research on socio-economic and political factors in order to comprehend the amount of risks associated. It is also advisable to have a comprehensive exit plan at one’s disposal if situation becomes unfavorable. For example- Motilal Oswal 500 S&P 500 Index Fund is a regional based fund as it is investing only in companies which are part of S&P 500 index i.e. companies which are listed in US stock exchanges.
Hybrid Funds- As the name suggests, these funds are the good blend of domestic and international funds. These invests around 65% in domestic equities and 35% in international equities.
Who should choose? Investors having moderate risk appetite can choose these funds as these are considered an excellent tool to make your portfolio rich by improving the tax efficiency.Tax efficiency can be understood by looking at short term gains and long-term gains. Gains stemming from three-year periods are accumulated with investor’s income and taxed according to his slab. On the other hand, gains arising from longer term investment i.e. beyond three years period are taxed at 20.6% profit with benefits coming from indexation which is greater than what you get with 10% long term capital gain in India based equity funds with no indexation. For example- Birla Sun life International Equity Fund.
Feeder Funds/Pure fund of funds– These types of funds do not directly invest in offshore marketsbut rather take an indirect route. Fund house pools money from investors and transfer it to the offshore fund. It is also known as the indirect way of investing in global companies.Example-ICICI US Prudential Blue Chip Equity Fund is a pure fund of fund/feeder fund. Let’s have a look on its return in below mentioned table
| Basis | Returns(annualized) | International Mutual funds | Rank within category |
|---|---|---|---|
| 1 year | 21.8% | 18.5% | 13 |
| 3 years | 18.1% | 8.2% | 6 |
| 5 years | 15.9% | 9.0% | 6 |
| Since its launch | 17.1 % | - | - |
Who should invest? Investors having more risk appetite can go for it as feeder funds give limited information about macro factors.
Funds managed by local funds- This comes in direct investment category as local fund manager directly invests the funds in international markets.
Who should choose?Investors having less risk appetite and feel safe when their portfolio is managed by the local fund manager than the one who lives offshore because their money is under the direct control of local funds manager who, in turn, assures the investors to grow their portfolio by tapping the emerging opportunities in the global market Example- Kotak Global Emerging Market Fund.
Thematic global mutual funds-These funds invest based on some theme which may or may not be like their domestic market themes. These themes may vary in a range of mining, real estate, natural resources etc.
Who should choose?This fund is suitable for investors who is targeting some specific sector or theme. For example - DHFL Pramerica Global Equity Opportunities Fund is a thematic global mutual fund which is investing in agriculture and allied agriculture themes.
Are global mutual funds relevant in Corona crisis also?
Surprisingly, Yes. It holds relevant in today’s tough time also. As per an article from Forbes, covid-driven rush to digital will largely benefit MNCs like Facebook, Amazon, Netflix, alphabet, etc. - are about to experience a boom in terms of technological innovations post Coronavirus. Investors across the globe are keeping an eye on these enterprises to make profit out of these disruptions.
Why should we invest in Global and international funds?
Diversification: Global funds pool money and invest in various countries hence diversifying one’s portfolio. Investors who want to diversify their investment portfolios and earn higher profits by taking the advantage of arbitrage would like to invest in global funds. The main advantage of international diversification is that it enhances risk reduction by the various markets around the world offsetting one another and it will result in a portfolio less risk than one invested entirely in the domestic market. These funds demand a longer-term investment hence more suited for investors who are looking for longer duration investments.
Hedge against domestic markets turbulences: Investors investing in international funds are being hedged against domestic market variations. History is evident that rupee has been depreciating against dollar continuously. It is great opportunity to take advantage of dollar appreciation.
Managed by more experienced fund house: European mutual funds industry is older than Indian mutual fund market. Investors can take benefit by investing in European markets as their money will be managed by more experienced professionals.
Access to foreign blue-chip companies: Some of the best global companies are listed outside India. For example, Apple is not listed in Indian stock Exchanges,but Indian investors can still invest in it via global mutual funds.
Is there any risk in global investing?
Risks in global mutual funds depend on various factors like geo-political nature of a country, currency exchange rates etc.
Currency risks: Indian investors are investing in rupees and then these rupees are getting converted into different currencies depending on the country you want to invest. You may get more/less returns depending on appreciation/depreciation of that country’s currency.
Information risk: When it comes to global mutual funds, it is very much essential to gather the information related to political situation, exchange rates etc. of that country as non-availability of complete information may result into risk which can harm your portfolio.
Macroeconomic factors: Macroeconomic factors have a direct impact on company’s profitability which in turn impact your international portfolio. In order to ensure the growth of portfolio, it is important to have a thorough knowledge of macroeconomic factors.
Time constraint: Studying global mutual funds demands a lot of time to analyze the viability of that funds. Investors who can devote that much time in analyzing can invest in international funds.
Conclusion: Retail investors who want to invest for long term, say 7-10 years can consider participating in Global mutual funds. Certain funds like Parag Parikh long term equity fund, SBI focused equity fund invest a small portion in foreign equity and are suitable for retail investors with long term investment horizon. Investors having high net worth can also explore international investing provided they want to invest for longer duration. Investments should be made by keeping in mind the currency fluctuation risks and political, economic factors. If your risk appetite and investment horizon is low, then you should not go for global investing.
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