Global Mutual Fund – Features, Risk and Returns
The investor of the twenty-first century is well-informed and aware of the performance of markets around the globe. For such investors, geographical boundaries no longer seem to be a hindrance for exploring investment opportunities and earning good returns. These investors now turn to Global Funds which allow them an opportunity to further diversify their portfolio and invest globally. Here, we will talk about these funds and the features and benefits offered by them.
What are Global Funds?
Global Mutual Funds invest in companies which are spread around the globe. They allow investors to invest in international markets.
So, are Global Funds and International Funds the same?
No. We understand that the names can be a little confusing but allow us to explain the difference.
If you are living in India, then international is everyplace except India, right? Also, global means all countries including India, right? The same logic applies to global and international mutual funds too.
- International Funds invest in all countries except the country that you reside in.
- Global Funds invest in all countries around the globe with no exception.
Features of Global Mutual Funds
Here are some salient features of these funds.
Helps you diversify
Usually, investors opt for these funds to further diversify their investment portfolios. Since global funds invest in a wide range of securities in several countries, the investment is truly diversified and does not carry concentration risk.
Risks and Returns
When you invest in different countries, the risk will depend on the market conditions and macroeconomic factors of every country. Hence, you must look for steadier markets before investing. Currency risk should also be considered since the change in the value of an international currency can impact the overall performance of global funds.
The returns from these funds can vary since there are several factors governing the performance of these funds.
Investing in Global Mutual Funds are a good way to hedge against inflation.
All mutual funds which invest primarily in foreign markets are considered to be non-equity funds for tax purposes. Hence, global funds are taxed as follows:
- If you sell the units within three years from the date of purchase, then the gains are added to your taxable income and taxed as per the applicable tax slab.
- If you sell the units after the completion of three years from the date of purchase, then the gains are taxed at 20% with indexation benefits.
Structure of Global Funds
Here is a quick look at the different ways in which these mutual funds are structured.
Based on how the fund invests its corpus
- Direct investment – The local fund manager directly invests the funds and manages the portfolio.
- Indirect investment – Where the funds are not directly invested but are either called:
- Feeder funds – where the fund house collects funds from the investors and transfer it to an offshore fund house
- Fund of Funds – where the investor’s funds are invested in a collection of foreign funds.
- Mix of foreign and domestic equity – These funds invest in both international and domestic markets and are a good option for investors with moderate risk tolerance. It also helps in increasing the portfolio’s tax efficiency.
Based on where the fund invests its corpus
- Regional Funds – which invest in specific regions or countries. Investors can choose to invest in specific regions or countries provided they have a good understanding of the economy of the region.
- Truly Global Funds – which have no regional or country preferences and invest in countries all around the globe. This leads to a more diverse fund portfolio.
Based on a specific theme
Some global mutual funds invest in securities based on certain themes. For example, you can invest in a global fund which invests in companies from the energy sector around the globe. This can be a great option when you are certain about growth in certain sectors.
Pros and Cons of investing in Global Funds
Here are the pros and cons of investing in these mutual funds:
- You have the opportunity to invest in the fastest-growing markets in the world
- You insulate yourself against the ups and downs of the markets in your own country
- You have a good chance to earn handsome returns
- The investment will be exposed to market risks but you might not be completely aware of all the nuances of the market.
- A change in the currency exchange rates for relevant currencies can hurt your portfolio.