It refers to the fund that invests most of its assets in the securities from the emerging countries with the economies. The funds that specialize in the emerging markets range from mutual funds to exchange traded funds. The four largest emerging nations in the world are Brazil, India, Russia, and China. These emerging countries are in a growth phase and have a high potential return with higher risks than the developed market countries. While they offer high growth rates, the risk involved is higher too.
How do the Emerging Market Mutual Funds work?
An emerging market mutual fund invests in a diverse collection of stocks spread across different sectors, countries, and market capitalization. For example, an emerging market fund decides to allocate 25% of the stock to China. This might spread across petroleum, banking, and other power sectors in China, focusing more on the mid-cap companies in the sector. It also helps determine the securities selection for each country. The fund is highly diverse, and it also offers an opportunity to earn from the growth of the economy.
Emerging Market funds seek to capitalize on the return opportunity that is presented by the emerging market economies. In the market, numerous equity and debt options are available for you to seek investment in a single country or a diversified portfolio of emerging market countries. Investors may invest in emerging market debt or equity to help build a diversified fund offering. Investors will find both the active and the passive funds, thus providing the emerging market exposure across the market segment.
Who should invest in the Emerging Market Fund?
Emerging market funds usually carry high risk levels with them. Also, economies take years to develop. These funds are recommended to investors with high-risk tolerance and long-term investment horizons that typically mean eight years or more. These emerging market funds are ideal for growth investors seeking investment opportunities in the global markets.
Companies are categorized based on the economies on the terms of the development, i.e., the developed, frontier, or emerging. Developed nations are also referred to as industrial nations, and they hopefully have developed economies with technologically advanced infrastructure. Frontier economies are those economies that are slightly less developed as compared to a fully industrialized nation.
Then comes the emerging market economies. These developing countries offer higher returns with higher risks relative to developed market countries. They are considered more stable than the frontier market.
Types of Emerging Market Fund Securities
Some of the most common types of securities are listed that make up the emerging market funds on the market:
Emerging Market Debt
One of the leading objectives that differentiate the emerging market debt funds is credit quality, as it provides access to debt investments with varying levels of risk. The emerging market debt offers the least risk among the emerging market investments. Investors have an option to invest in both active and passive funds. Some of the leading indexes for the passive market funds include the Bloomberg Barclays Emerging Markets USD Aggregate Index and J.P. Morgan Emerging Markets Bond Index.
Emerging Market Equity
It encompasses a broad range of companies from emerging markets around the world. Investors can invest in passive indexes to seek actively managed funds or for emerging markets exposure.
Factors to consider before investing in Emerging Market Fund Securities in India
Some of the essential aspects that should be considered before investing in emerging market funds in India are:
1. Risk and Returns
The emerging-market funds offer rapid potential growth, and therefore several risks come along with it:
- Inflation Risk: In emerging countries, fast economic growth leads to inflation.
- Currency Risk: as the economies are volatile, fluctuations in the currencies can lead to volatility in the investments made in those currencies.
- Political Risks: There is growing political instability in the growing countries which puts an added pressure on the performance of stocks.
- Institutional Risks: Regulations are still being formed and implemented in emerging countries. This makes it difficult for the fund managers to make informed decisions.
2. Expense Ratio
It is the small percentage of the fund’s total assets that is charged by the fund house towards fund management services. It is vital to ensure that you find a fund with a lower expense ratio to maximize the gains.
3. Invest according to the investment plan
As India is a part of the emerging market, investors in India have firsthand experience of the ups and downs that the emerging economies go through. Although, there are some of the smaller emerging markets that offer excellent growth potential. It is also essential to diversify investor’s portfolios and invest in small portions in the emerging markets.
As it is an equity fund, emerging market funds are also subject to additional capital gains tax.
5. Capital Gains Tax
Similar to other mutual funds, emerging market mutual funds also attract capital gains tax, depending on the holding period. The holding period is the period for which you remain invested in the mutual funds. It ends once you redeem your funds. According to the holding period, the units can attract STCG ( Short term capital gains ) or LTCG ( Long term capital gains).
- Long Term Capital Gain (LTCG):Your investment earns long-term capital gain tax if the holding period extends more than a year. It does not apply up to Rs 1 lakh. After that, the long-term capital gains are taxed at 10% without indexation benefits.
- Short Term Capital Gain (STCG):Your investment earns STCG if the holding period is up to 1 year. The tax that is implied is 15%.