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Investing in International Mutual Funds

With INR consistently falling compared to USD, and the opportunity to invest in global brands, is it time for Indians to seriously consider international investing.
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Of late, there have been several questions surrounding the feasibility of international investing. Especially in index funds based on the S&P 500, or the NASDAQ 100. The questions surrounding international investing in India can be broadly categorised into two categories

  1. Why Should I invest internationally?
  2. Is it feasible/convenient to invest in international funds?

Let’s take a look at both, and some more, shall we?

Why Should I Invest Internationally?

India has certainly delivered on the promise of growth and development in the last decade. There’s also a massive potential for future growth in the country, which is the driving narrative behind people refusing to invest outside India.

While, yes, it is true that India has developed significantly over the last few years, it is equally true that there are more benefits to investing internationally.

International Markets Have A Good Track Record

Apart from being able to invest in well known international companies, such as Amazon, Apple or Tesla, you also get to invest in broader and well-diversified funds like the S&P 500 or the NASDAQ 100. If past performance is any indicator, the S&P 500 saw a whopping 295% increase over the last decade.

Past performance however is one of the least important reasons to invest. But it does prove that global markets have the capacity to deliver good returns.

International Investing Offers The Advantages of Diversification

Mutual Funds in India, tend to move together, and as such, offer little diversification. Take a look at this chart below, which indicates the performances of several indices over the years

calendar-returns-equity-index

These indices have a trend of rising and falling together, which is not what you’re looking for if you’re looking to diversify your funds. The primary reason that you’re diversifying is an attempt to mitigate the market risks, which is not achieved by investing in different domestic index funds.

India constitutes less than 3.5% of world GDP share. So it would be accurate to say that investors in India are missing out on 95%+ of wealth creation opportunities outside India. Diversification allows greater participation in global prosperity of businesses.

Currency Rates Play A Role In International Investments

And, let’s not forget the obvious money depreciation and inflation rates:

  • The INR has depreciated at a CAGR of 3.70% when compared to the USD over the last decade.
  • From INR 43 to 75 for one USD over a period of 15 years, the mighty dollar has seen a 174% increase.

What Does It All Mean?

To put all this data into perspective - had you invested Rs 1,00,000 in the S&P 500 at the beginning of the last decade, you’d have seen a return of approximately Rs 5,13,000 from your initial investment. This would be more than 5 times of your initial investment.

So if your question is if you should invest internationally, then yes, you should at the very least consider a small percentage of your portfolio for international investments.

Is it Feasible and Convenient to Invest Internationally?

This is the major challenge when people begin to invest in international funds. Traditionally, the process is tedious, and there are a lot of compliance factors to keep in mind before starting to invest internationally.

  • One such traditional route is to open a foreign broking account and transfer your funds through the Reserve Bank of India’s LRS (Liberalised Remittance Scheme).

These broking accounts tend to be priced at around $10 a month, and wouldn’t be ideal for someone making small investments on international funds. This method of investing in foreign funds also attracts tax complications, which along with the cost, makes this method of investment ideal only if you have a sizable investment to make using this method.

  • The other common way of investing in foreign indices, is to invest in feeder funds. Feeder funds are mutual funds, which collect funds from individuals, which in turn invests those funds into a master fund, which would be an international fund in this case.

However, the costs associated with such funds (an average of 1.5%), makes this a less attractive option in case you’re looking to invest in foreign funds.

  • The third method is to invest in funds like global index funds, which directly track the performance of their respective indices. While costs vary from fund to fund, they remain low for such index funds, making them a more attractive option than feeder funds.

In addition - globally passive funds (especially in developed markets such as US and Europe) tend to do better than active funds. Some funds tracking US indices have outperformed a majority of active funds over the last 15 years.

Added benefits include not having to face the additional tax and compliance complications, which is normally the case when investing internationally via LRS.

Disclaimer: This article is not investment advice or a research report, and should not be taken as such.

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