As financial advisors, we often come across questions from our clientele which do not come with a simple yes/no answer. The workings in finances do not have often have a simple cut-and-dry way to go which is the sole right way, in fact, there may be multiple solutions to the problem and it all remains to be highly subjective to individual scenarios.
Should you consider foreign mutual funds in your portfolio?
Our client Nikita is now a senior executive at an FMCG company. She earns a considerable amount and is a disciplined saver and investor. She has a portfolio of several mutual funds, tax-free bonds, and fixed deposits. Her main goal for amplifying her wealth is to provide for the higher education of her children. For the sake of diversification, her friends have told her to invest in international funds, but she happens to be skeptical and does not understand how this could help her cause and also wants to know the risks associated with it.
Nikita’s friend has her interests in mind and wants her to invest in instruments spread across geographies, so, that if her Indian investments underperform due any country-specific reasons then her international investments would still provide her with ample returns. Thus, this would lower the overall adverse impact on her financial health in downtimes.
How to invest in foreign mutual funds from India?
However, only investing in foreign investment options should not be taken as a hedging or an insurance against all kinds of bad returns or an otherwise smooth ride. With a diversified portfolio of international funds, her domestic and foreign investments could offer similar amounts of money as returns but with different timings of rising and fall. This would work out to balance her risks.
What is the risk in foreign mutual funds investing?
But the biggest risk factor still remains the currency volatility for Nikita. Investment in international instruments would translate into the fact that her investments would be exchanged into international currency at a certain exchange rate at a point in time. And then back at the point of redemption, her investment will be converted back to INR at the ongoing rate of exchange. In case of the unchanged rate of exchange the return in INR will be equal to the portfolio return and if the value of rupee drops the return amount would be greater than the portfolio return and so on vice versa.
How rewarding is investing in international funds?
In Nikita’s case, it may be a good idea to invest in international instruments. This is when if she wants to fund her children’s higher education in foreign countries. As sooner or later for such a scenario, she will have to convert her INR income into dollars. This is for whenever she would need it. Thus, investing in an international asset like mutual funds means she will get returns in USD terms as an investor.
In conclusion, investing in international funds has both rewards and risks attached to them. Nikita may be keen say, for a foreign income to fund foreign education or a holiday. In such case investing in international funds may be a good idea. But the biggest risk attached to international investments is the currency risk.