How an investor can diversify their portfolio by investing internationally?

Investors who are new to the mutual fund spectrum must know that diversification is the key to reduce the overall risk of one’s investment portfolio. The word diversification is suitable for the old investment adage, “Do not keep all your eggs in one basket; something that is relevant even in the current scenario. The phrase tries to emphasize the importance of diversification but doesn’t delve into the actual implications that provide insights into the reasons why an investor must seek portfolio diversification. Let us understand the importance of diversification and how mutual fund investors can use it to their advantage.

Understanding the importance of portfolio diversification

Diversification in mutual funds means building an investment portfolio that includes various asset classes. This allows the investor to reduce the potential investment risk that can affect the performance of the overall portfolio. For example, if an investor invests only in equity funds, or invests in any one particular sector or industry, such an investment portfolio may face concentration risk. Hence, mutual fund advisors usually recommend retail investors to invest in a diversified portfolio of assets to minimize investment risk.

Investing in various assets may be one way to diversify an investor’s mutual fund portfolio, but it is possible to seek global diversification by investing in funds that invest in foreign markets. Such investors who wish to give their investment portfolio global diversification can consider investing in international mutual funds.

What are international mutual funds?

While domestic mutual funds invest in domestic markets and bonds, international funds aim at generating capital appreciation over the long term by investing in equity and debt instruments of companies listed in countries outside India. Investors who own a variety of domestic stocks in the portfolio may consider adding international mutual funds for global diversification.

Different types of international mutual funds

Before investing in international funds, investors may have to analyze the different types of schemes and their investment styles to identify which international fund is ideal for their investment objective.

Fund of Funds: Here, a feeder fund (domestic fund) invests money accumulated through investors in a foreign fund/s that is managed offshore by another AMC.

Global Funds: These mutual funds invest in global markets including in the markets of the country of their origin. These are different from international funds that invest in foreign markets excluding the domestic markets of their country.

Sectoral Funds: International funds that target a specific theme or sector like real estate, pharma, crude oil, petrochemicals, etc. are referred to as sectoral international funds.

Country Specific Funds: Some international funds may choose to invest in specific countries and only explore investment opportunities restricted to the markets of these countries.

Region Specific Funds: International mutual funds that invest in a specific region like the UK or Asia or Europe etc. are referred to as region specific international funds.

How to diversify your investment portfolio by investing in international funds?

Before investing in international funds, investors must understand that they need to have a very high risk appetite for investing in these funds. International mutual funds are market linked schemes whose investment portfolio is constantly exposed to the equity market’s volatile nature. Hence, investors need to determine their risk appetite before investing in any type of international mutual fund scheme. Also, the investment objective of the international fund must align with the person investing. Investors may have to understand that their investments in international funds are exposed to political and economic risks prevailing in that country or region.

International funds may continue to deliver even when the domestic markets are facing an economic downturn. That’s because the underlying securities of the international fund do not get affected by the fluctuations in the domestic markets and may thus continue to perform. While investing in international funds may offer investors international diversification, investors may also look at other asset classes like debt and gold to avail of true diversification. That way, if both, domestic and foreign equity markets are going through a rough patch, investment in debt assets may provide the necessary cushion and minimize overall investment risk. Investors who aren’t sure about how much of their monthly investment should go into international funds can seek the help of a mutual fund expert or even talk to their financial advisor who might help them make an informed investment decision.

Once investors identify how much money to invest in an international fund, they can consider starting a SIP in that scheme.Systematic Investment Plan or SIP allows investors to invest small fixed sums at regular intervals. Investors can even use the SIP calculator on the sip app to determine the estimated returns which they may receive at the end of their investment journey.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.