A Global Fund of Funds is an investment avenue that allows domestic investors to participate in global equity markets through investments made locally. Investors can do this through a domestic mutual fund house (AMC) offering a scheme that invests in global funds.
Such schemes aim to achieve specific goals by investing in global companies across economies. This is an excellent vehicle for domestic investors to gain exposure to the biggest global companies through a single investment.
Because the world is a single market, a global fund of fund allows investors to benefit from major international developments. Moreover, investing in specific markets can help investors leverage their inherent strengths, for example, Latin America (commodities), Asia region (services), US (has a highly diversified economy and is a key market for emerging regions), BRIC (highly promising developing economies) all have specific industries that outperform others.
Diversification via Global Funds
Global Fund of Funds are considered as an excellent opportunity for diversification because investing in global funds provides access to a wider range of markets reducing exposure to country-specific risks. Since global markets usually don’t move in the same direction, spreading your investment across geographies can protect your portfolio from risks of volatility in the market.
Taxation Policies: One should note that when investing in international funds, a large chunk of the principle is placed on foreign equities. These are treated as debt funds and taxed accordingly. Long-term investment returns are levied at 10% without indexation and 20% with indexation. Short-term gains are included to the income and taxed according to the applicable slab rates.
Why Global Funds?
Global Fund of Funds provides a unique opportunity to domestic investors to participate in international markets. Some of the advantages of global fund investment include:
· Provides access to specialised international markets
· Decreases risk factors as different economies react differently to international developments
· Protects against loss or risk by spreading your investments
· Provides access to the expertise of international fund managers
Although global fund opportunities are invariably evolving, there is a wide range of investments themes that these funds offer. These can be based on geography, asset-classes, commodities and sectors to name a few. However, just like any investment option, global fund of funds also brings certain risks factors along with them.
Currency Risks: Apart from its own performance, investment returns on international funds also depend on the performance of the local currency.
For example, if you are an Indian investor and you have invested in stocks in Brazil, your gains are affected by two parameters – the change in the price of the stocks and the change in the value of the Brazilian Real and the Indian Rupee. So, if you gain 10% in your Brazilian stocks but the Brazilian Real depreciates by 15% against the Indian Rupee, the effective gain will be nil.
Geopolitical Risks: Geopolitical risk, in the form of unfavourable conditions in the country where investment is made, such as earthquakes or riots, can influence t he return on investment. Investors are advised to invest in a wider geographical scenario, so that they can freely exit affected regions without losses.
Other Risks: Investing in global funds requires a deep study in international markets, which requires time and access to research reports to determine whether the fund fits the investor’s portfolio. Most global funds also carry dual expenses; local and international that should be assessed before deciding to take a leap in the global market. However, according to SEBI, global funds can charge only up to 2.5%.
If you are looking to diversify your mutual fund investments, consider Global Fund of Funds as an option. While they help mitigate domestic risks to a certain extent, conservative investors are recommended to allocate a small portion of their portfolio to global funds.