Choose Global Funds Only If Your Core Portfolio Is In Place!

By | May 28, 2012

This season, do not be surprised if financial advisors suggest global mutual funds to be the best bet. This is because these funds have generated good returns, which are four-times greater than the returns offered by a fund in the domestic market. But before you make a plunge for these funds, it is important to do a little research on their behavior, so as to understand their features in a better manner.

First of all, ensure that you choose the right global fund that provides the correct global exposure. In India, it is normal to come across several mutual funds that are although mandated in global equity investment, are allocated in such a manner that they are heavily tilted towards domestic stocks in the market. If the global exposure offered by the fund is as low as 20%-25%, then it is integral to comprehend that this low allocation could dilute the consolidated exposure of your portfolio in the global market environment. As a result, your investment could end up going in for a risky toss.

Secondly, understand about the performance of economies and regions that the fund has targeted and has invested in. An investor will receive the actual benefits of the global diversification in a mutual fund only when they are invested in those economies that share low correlation with each other and react differently to events that span globally.

Thirdly, instead of investing in global portfolios in India, try to reap maximum benefits investing in emerging economies like China and Brazil, since these markets are renowned for their tandem performance.

Fourthly, Global mutual funds can also be subject to a great deal of hidden expenses. Most global funds act as feeder funds where they invest in a parent fund located abroad, which in turn invest in other global equities. This results in greater expenses for you as an investor as it adds up to the expenses on your fund, hitting your yield for a long-period of time.

Fifthly, you may also face greater additional risks since your risk goes global, along with your global mutual fund. As for other types of investments, global mutual funds are also subject to an array of varied political, geographical, economic, and other country-specific risks, that may hinder the growth of your global mutual fund investment. A specific country in which the parent fund is located may react differently to different type of cash flows. If the reaction is awry, you are in risk of losing your funds, pushing you to the extent of borrowing debts like loans, personal loan etc., to finance your requirements.

Sixthly, your global fund will be subjected to taxes as they are treated in accordance with non-equity funds. If you have invested in global fund with a long-term capital gain, then you would be charged with a tax rate of 10% without any indexation, and 20% with indexation. You could also be imposed with tax rates as high as 30% if you have invested in global mutual funds with a short-term capital gain. However, if you have invested in a global mutual fund that have invested 65% or more of its funds in Indian equities, then you would be taxed on par for tax purposes with the Indian equity funds.

If you are seeking to make an investment in global mutual funds, selecting a fund will be an easier task since these funds almost always make an investment in the corpus of parent global funds, which have stuck around for quite some time in the market. You need to understand the performance of these funds over a 3-5 year period, so as to understand the quality of the fund you are making an investment in. Also, these funds are meant for an investor who has some experience in dealing with funds due to the complexity of risks involved. Many financial investors advise first-time investors to stay away from these funds not only because of the risk, but also because India is one of the best-performing global markets in the world. Thus, global funds are ideal for those investors, whose core equity portfolio is in place and they are seeking to diversify their additional equity on an international basis. If you really want to go ahead and wish to invest in these funds, ensure that your investment in global funds does not exceed 20-25% of your portfolio, since one needs to choose a global fund that matches the investment requirements in terms of its allocation, asset-wise as well as economy-wise.

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