Things to Consider Before Investing in Global Funds

What are mutual funds?

Mutual funds are a pool of professionally managed funds that invest across multiple asset classes for income generation. It is the duty of the fund manager to buy and sell securities in quantum with the investment objective of the scheme so that in the long run it is able to

What are global funds?

Categorized as funds of funds (FoFs) global mutual funds are equity funds which invest in international markets. Global fund investors find themselves indirectly venturing in foreign markets for income generation. You can actually invest in international markets through investments in an Indian mutual fund scheme. There are some mutual funds who just like normal equity funds invest in international equities.  These global funds can also work as a hedge against market risk which Indian mutual funds hold. For this reason, investors can add some international diversification to their local mutual fund portfolio by investing in global funds. There is a common misconception among Indian investors that those who invest in global funds are charged an expense ratio that is twice as much as compared to Indian equity funds. However, as per SEBI guidelines Asset Management Companies cannot charge more than 3 percent expense ratio for global fund investors.

Things to consider before investing in global funds

Although global funds give investors an opportunity to seek capital appreciation from international markets, that shouldn’t be the sole purpose of investment. It is essential for investors to understand that global funds are heavy investors of equity. They depend on generating capital appreciation by predominantly investing in foreign company stocks and other equity related instruments.It is essential to have a defined financial goal so that it makes financial planning easy. When you have a particular numerical digit in mind, then you might find it easy to invest in certain schemes which may hold the potential to help you get closer to your financial goal.

If your financial goals require you to invest in global funds, next thing investors need to address is their risk appetite. For every investor, understanding their risk tolerance and risk appetite is necessary. If you are an aggressive investor who doesn’t mind exposing their finances to dangers of equities, you might find global funds suitable. However, it is also necessary to have a long term investment horizon since equity related instruments are vulnerable to daily market upheavals. If you have to use the investment amount in the coming six months or one year, a global fund might not be the ideal investment choice. In fact, there is a good chance of your global equity scheme portfolio incurring losses over the short term. And this is exactly why an investor’s investment horizon, investment objective and risk appetite mustalign with the global fundscheme he/ she is about to invest in.

Global fund investors have the choice of either making a lumpsum investment or option for a Systematic Investment Plan (SIP). Investors with surplus capital at their disposal can consider making a onetime lumpsum payment towards their global fund portfolio. Investors will be allotted units in quantum with the investment amount and depending on the fund’ existing NAV (net asset value). However, if you want to invest Rs. 6,00,000 in global funds over the period of 5 years but do not want to invest the entire investment all at once, you can consider starting a SIP in global funds. SIP allows investors to make small investments at regular intervals. So,by starting a monthly SIP of Rs. 10,000 per month, you will be able to invest Rs. 5,00,000 over a period of five years and earn interest.

These were some of the thing’s investors should consider before investing in global funds.If you need further assistance in making an investment decision, do consult a financial advisor.