This asset class is the most talked about among financial advisors these days. If you think that you have it in you, go global! Investing in foreign stocks provides 4 times the returns of investing in domestic markets.
But there are certain factors you need to bear in mind, before jumping into investing in this asset class:
Nature of your fund:
Ensure that you global fund is really global. Most Mutual fund covers advertise about investing in global markets but only invest about 20% to 25% of the fund’s assets in the global markets.
Ability to diversify:
If your fund house invests most of your funds in India, the assets will not be diversified. It is equally important to learn about the global markets or economies, especially of the country or region you wish to invest in. Without knowing these factors, it can cause a lot of problems wherein you can lose out all the money you put in, making you liable and pushing you into a debt trap of a loan or a personal loan to bail yourself out.
Hidden charges:
There can be a lot of hidden expenses present for carrying out a transaction. Most global funds are feeder funds – they invest their corpus in their parent fund abroad, which, in turn, would invest in global equities. This structure of transaction can cut off your returns in the long run. For example, Blackrock World Gold Fund – the parent fund of DSP World Gold Fund – has an initial charge of 5% and annual management fee of 1.75% which much more than what a domestic mutual fund might charge you.
Risks:
Investing global is affected by phenomena like shifts in the geo-political system, legal, religious, or enviro based issues as well. These factors will not affect the domestic Mutual Funds. Consider the stability of the economy and the governance in a particular country and its past economic shifts and then consider investing your funds.
Taxation policy:
Since, global funds are treated as non-equity funds they are taxed accordingly. For example, after one year of investment, your profits would be taxed at 10% without indexation or at 20% with indexation. Short-term capital gain would be taxed as per your tax slab. Thus, it could be as high as 30%. But if 65% of your funds are being invested in the Indian markets then they will be treated as domestic mutual funds and will be taxed accordingly.
Past record:
It is very important to analyze what is the economic history of the company in which you want investments to grow. If the past economic record appears to be shaky then quitting the idea of investing will be prudent. You can track the performance of the parent funds for the last three to five years (wherever possible) and benchmark the same against global indices like MSCI World Index or MSCI EMEA.
Not for every investor:
Only those investors who have a core portfolio, as in whose assets have been properly allocated to the equities class, domestically, and are performing well, can go ahead with global investments. Make sure these funds do not constitute more than 15-20% of your portfolio. Amongst global funds, after some introspection, one needs to choose a fund that matches his/her investment needs – both in terms of economy-wise diversification and asset-wise allocation.