One of the best ‘mantras’ of investing is finding opportunities that are sure to grow at a rapid pace. Be it equity or real estate or gold, if you know that the prices are going to rise, then you will try to buy and hold for some time. Talking about equity investing, emerging markets offer great opportunities to earn potentially high returns. Here, we will talk about emerging markets and the features and benefits offered by Emerging Market Funds.
Emerging Market Funds are equity funds or exchange traded funds (ETFs) that invest in stocks of developing countries. By definition, an emerging market is a country that is developing and is on track to becoming a developed country soon. The four largest emerging markets in the world are India, Brazil, Russia, and China. While these markets might offer high growth rates, the risks are higher too. Investing through an Emerging Market Mutual Fund allows you to spread the risk by limiting your exposure to a single stock or country.
An emerging market fund invests in a diverse collection of stocks spread across different countries, sectors, and market capitalizations. For example, an emerging market fund might decide to allocate 25% of its stocks to China. Further, it might spread this across banking, petroleum, and power sectors in China and focus more on mid-cap companies in these sectors. Similarly, it can determine the securities selection for each country. Hence, the fund is highly diverse and offers an opportunity to earn from the growth of the economy.
Emerging Market Funds carry high levels of risks. Further, economies can take years to develop. Therefore, these funds are recommended to investors with a high tolerance for risk and a long-term investment horizon (8 years and more). The funds are ideal for growth investors seeking investment opportunities in the global markets.
Here are some important aspects that you must consider before investing in emerging market funds in India:
Since emerging market funds offer rapid growth potential, there are several risks that come along with them:
While investing in emerging markets can offer tremendous growth opportunities, you must consider the risks before investing.
Expense Ratio is a small percentage of the total assets of the fund charged by the fund house towards fund management services. You must ensure that you find a fund with a lower expense ratio so that you can maximize your gains.
Being a part of an emerging market, investors in India have a first-hand experience of the ups-n-downs that markets in emerging economies go through. However, there are some smaller emerging markets that offer great growth potential. It is important to diversify your portfolio and invest a small portion in emerging market mutual funds. This is akin to backing an underdog hoping that it will win. While emerging countries will develop sooner or later, staying invested in the right selection of stocks is essential. Hence, research the fund and the fund manager well before investing.
Being an equity fund, emerging market mutual funds are subject to capital gains tax.
Like other mutual funds, emerging market mutual funds will also attract capital gains tax depending on the holding period. Simply put, the holding period is the time period for which you remain invested in the mutual fund. The holding period ends once you redeem your funds.
As per the holding period, the units redeemed can attract STCG ( Short term capital gains ) or LTCG ( Long term capital gains). Let us see what they are:-