As the rupee weakens its position, investors start fixing their eyes on the prospect of making investments in international funds. Although they offer the temptation of higher profits over a short period of time, luring investors with an offer that is hard to miss, international funds lack diversification in their investments. While a few international funds like the MoST NASDAQ-100 ETF have performed considerably well with profits as high as 16%, a comparison with Indian funds reveals that its Indian counterparts have only been able to gain an appalling 3-5% in profits. But if you wipe the magic off your eyes and give a closer look to international funds, you will realize that international funds are based on the play of exchange rates. Thus, the returns you receive as an investor from these funds are dependent on the real investment gains and losses, plus the changes in currency of the Indian rupee and other underlying investments. If you pay attention to its arithmetic, you will get a straightforward answer that if the value of the foreign investments in dollars is constant, each dollar will have its worth more than rupees.
Although this may seem appealing initially, it is actually quite a frightening prospect as they actually represent the most volatile and dangerous source of returns in a fund. In the normal course, if you are seeking to make an investment in international markets, it should be primarily for the purpose of geographic diversification. This will be a profitable option since if investments do not perform well in one side of the globe, they perform relatively well in the other part, thus protecting investors from a major loss. However, this strategy came to an end with the worldwide financial crisis that shook the world in 2008. With economies of countries interlinked with each other, investors weren’t able to hold on to most of their funds. These funds also focus on narrow investment mandates, or are either thematic or region focused. Thus, they contribute in no manner to the purpose of offering diversification to investors.
As international funds have a lot of inter-related pros and cons instilled within them, it is best for you to leave the choice of investing in them to your fund manager. You, as an investor, must make diversification in investments as your primary decision, and leave all worries related to foreign exchange rates and other issues to your fund manager. While expectations to make the mandate of diversified Indian funds should be amended so as to enable a fund manager consider the global economy as an investable universe, funds in India are not very suitable for this purpose.
Investments in international funds are not meant for all, especially for risk averse investors. Most financial advisors advise this to only those investors who do not have any kind of loans like a personal loan, home loan etc on their accounts and have a robust and a well balanced portfolio. After having completed one’s financial requirements like buying a house, setting aside funds for child’s education and marriage, after saving an ample amount for post retirement needs and aligning proper life and health insurance covers for yourself etc then you can consider investing in such funds. The reason why this should be treated as a last option for investment is the main reason as mentioned above, fluctuations in the dollar and the high level of interdependence between countries due to globalization. Any insignificant wars or changes in the foreign policies are likely to cause harsh blows to your returns. Consult your financial advisor about the present global economic scenario and your possibilities of achieving good returns if you invest in international funds.