Global Mutual Funds: Meaning, Types and Factors To Consider

Today's interdependent world makes investing outside domestic borders a very appealing idea for those interested in higher returns and diversification benefits. Global mutual funds present an easy access point for participating in the growth story of overseas markets, and they help provide diversity to the portfolio for different economies, sectors, and investment themes. However, the complexities of global funds can be tough to deal with; they demand proper knowledge and an intelligent manner to handle them.

This chapter provides everything you need to know to help you judge the most suitable funds for your global fund investment portfolio. We will discuss the intricacies of international investing, examine various fund structures, and offer a detailed system to help you evaluate and pick funds to help you achieve your investment goals and maintain your risk profile.

Why to Invest in Global Mutual Funds? 

International markets have several attractive advantages that can help you improve your portfolio's risk-adjusted return and growth prospects.

Here are some key benefits of global diversification:

1. Geographical Diversification: Diversifying your investments to other territories and economies will lower the market risk of most of your funds being in the home market. This diversification may save your portfolio from local economic recessions, political instabilities or industry-specific shocks.
2. Access to Global Growth Opportunities: Global funds offer the chance to partake in the growth stories of multiple sectors and industries worldwide. This exposure may enable some innovative companies, emerging technologies, and dynamic markets that may not be well represented in the local market.
3. Currency Exposure: All international investments have the element of currency fluctuations. Such exposure is a hedge against domestic currency movements. It may improve Indian market returns when the Rupee falls (depreciate) relative to other major currencies.
4. Reduced Correlation with Domestic Markets: The international markets tend to have a low correlation with the Indian market, giving diversification benefits and the possibility of superior risk-adjusted returns. Mixing domestic and international investments will render a balanced and durable portfolio.

Types of Global Mutual Funds 

Before delving into the selection process, it's crucial to understand the two primary structures through which international funds operate in India:

• Fund of Funds (FoF)

In this particular structure, an Indian mutual fund invests in an underlying international mutual fund managed by a foreign asset management company. In this way, Indian investors can participate in the international markets but avoid direct investment abroad. The Indian fund manager acts as an intermediary in the selection and monitoring of foreign funds and their performance processes.

The convenience involved in the FoF structure is one of its benefits; Indian investors can access well-established international funds without tackling complicated cross-border rules and regulations. 

Nevertheless, this system is also accompanied by extra costs because the Indian and the remaining foreign funds will charge management fees separately.

• Direct Investing

The Indian mutual fund directly invests in international stocks, securities or indices with any intermediate fund. The fund manager is directly accountable for the direct research, selection, and management of international investments.

Direct investing is more cost-effective and offers control since no extra layers of fees or management are involved. 

Nonetheless, it demands the unique expertise of the fund manager in the analysis and selection of international investments. Fund houses that are globally strong and have good research capabilities may be more suited to handle direct international investments properly. 

Both structures have advantages and disadvantages, with the final decision depending on the investor’s preference, risk tolerance, and investment goals.

Factors to Consider When Choosing Global Funds

Now that you have a clear understanding of the fund structures, let's dive into the key factors to consider when selecting global funds for your portfolio:

• Geographical distribution

The geographical distribution of international funds may range from regional or country-specific to a global investment approach. Depending on your investment goals, risk tolerance, and investment choices, you may choose funds with a certain geographical focus (e.g., the US, Europe, etc) or a multi-market fund.

For example, emerging economies' funds may provide more exposure to economies with faster growth but higher risk. 

However, overall, global funds provide diversification across several regions all around the world, which minimises the risk attributed to an investment in one single financial market.

• Investment Style

Multi-geographic global fund strategies include growth, value, and combination-based approaches just like domestic funds. 

Growth funds usually invest in firms that are expected to achieve high earnings growth, usually in industries like technology, healthcare, or consumer discretionary. These investments thrive in times of an economic boom but can be a bit more susceptible to economic downturns. 

On the other hand, value funds look for underrated organisations that are attractive as far as valuation is concerned, usually in sectors like financials, industrials, or energy sectors. Additionally, such funds may also have the capacity to outperform in market recoveries or when investors’ sentiment moves towards a conservative type of investment.

The blended funds combine both growth and value styles, therefore presenting a balanced approach that aims to capture opportunities under various market cycles.

But overall, similar to domestic funds, you have to understand the fund’s investing style or philosophy before you choose to invest. 

• Sector or Thematic Focus

Some global funds specialise in a particular sector or investment theme. These funds enable access to specific investment propositions and are mainly favoured by investors who are bullish on an industry or trend.

Nevertheless, it should be pointed out that sector or thematic funds are riskier because of their limited scope. A negative momentum or disturbance in a particular sector or theme can greatly impact the fund's performance. Therefore, these funds are mostly appropriate as tactical or satellite positions in a diversified portfolio.

• Active vs. Passive Management

Active management of global funds can be done through mutual or exchange-traded funds. Active funds are generally managed by fund managers who actively choose and trade securities using their research and investment strategies. These funds aim to beat their related benchmarks via good stock picking and time the market.

On the contrary, passively managed funds seek to duplicate a particular index or benchmark. Such funds normally have lower expense ratios than actively managed funds because they don’t require in-depth research and analysis. Yet, they could still lag behind their benchmarks because of tracking errors and other overhead costs.

• Expense Ratio

Like any other mutual fund investment, it is important to look at the expense ratio, which is the annual cost of ownership and management of the fund. The smaller the expense ratios, the higher the net returns in the long run, as a small part of your investment is used for fees.

One should find a trade-off between cost and expected gains when assessing global funds. Although lower fee funds may sound like a good offer, one should factor in the whole risk-return profile of the fund and management team expertise.

• Fund Manager's Track Record

Examine the fund manager’s background, investment approach, and what the manager has done during previous bear markets. Continuous outperformance history may suggest competent management and a possibility for superior returns; on the other hand, an underperformance record may make people doubt the fund’s capacity to counteract market challenges successfully.

Moreover, look at the fund manager's tenure at the fund and the investment team's stability. The ease with which these personnel changes can occur may play havoc with the fund’s investment strategy, possibly leading to poor performance.

• Risk-Return Profile

Study risk-return properties of the funds, which include volatility, drawdowns, and risk-adjusted performance measures such as the Sharpe ratio or Sortino ratio. Such metrics can show how well the fund can produce returns while managing the risk.

The key is to maintain a trade-off between expected profits and the risk you are willing to take. A fund with a higher historical return might be inappropriate if it has a lot of volatility or large drawdowns in the market downturns.

• Currency Exposure

By their nature, international investments carry currency risk. Currency exchange rates can affect the fund's returns when translated back into Indian rupees as they fluctuate. Evaluate the fund’s currency exposure and whether it matches your investment objectives and risk tolerance.

Some funds actively manage currency exposure via hedging strategies, while others prefer to maintain an unhedged position, which means that investors are fully exposed to currency movements.

• Correlation with Domestic Portfolio

Analyse the fund’s correlation with your current domestic portfolio. A lower correlation benefits diversification, as factors other than your domestic investments may affect the fund's performance. However, the higher correlation could also reduce the diversification benefit because the fund’s performance would be more closely related to the home market.

Through thoroughly considering these factors, you will be able to single out global funds that match your investment goals, the level of risk with which you are comfortable, and the general strategy of the portfolio.

Evaluating Fund Performance and Consistency

While analysing the performance of global funds, one should not concentrate only on short-term returns and take into account the long-term stability of returns. Analyse the fund's performance through different market cycles and benchmark it against the relevant benchmarks or peer groups. The consistency of the fund manager in the outperformance of the benchmark during longer time frames is a measure of the fund manager's skill and the potential returns and sustainability of the fund.

Here's a table illustrating the performance of various international funds across different calendar years:

Fund Name	2022	2021	2020	2019	2018	2017	2016	2015	2014	2013
Franklin India US Opportunities Fund	-19.70%	25.70%	23.90%	27.40%	-0.80%	22.40%	7.90%	-2.80%	27.60%	31.60%
Invesco Global Consumer Trends Fund of Fund	-29.90%	12.30%	37.10%	30.10%	-9.60%	22.90%	-1.40%	9.30%	12.10%	30.30%
DSP US Flexible Equity Fund	-19.80%	26.20%	22.20%	27.10%	-1.80%	23.70%	9.20%	-2.30%	25.20%	29.30%
Edelweiss Greater China Equity Off-Shore Fund	-18.80%	-16.30%	25.50%	28.50%	-18.30%	45.10%	-4.90%	-0.90%	9.40%	4.30%
Kotak NASDAQ 100 Fund of Fund	-28.80%	28.10%	46.30%	37.90%	5.10%	29.40%	6.60%	9.50%	25.90%	25.90%
Motilal Oswal NASDAQ 100 Fund of Fund	-28.70%	27.60%	46.60%	38.10%	4.90%	29.30%	6.80%	9.80%	26.10%	25.90%
Motilal Oswal S&P 500 Index Fund	-15.50%	28.70%	16.30%	25.70%	4.50%	20.10%	9.30%	1.40%	25.90%	24.10%

This table provides a glimpse into the performance of various international funds across different calendar years. It's essential to analyse the consistency of returns and the fund's ability to outperform relevant benchmarks to make an informed decision. Funds that consistently outperform their benchmarks over extended periods may be better positioned to generate superior risk-adjusted returns.

Expense Ratio Comparison 

When evaluating global funds, it's crucial to consider the expense ratio, which represents the annual cost of owning and managing the fund. While lower expense ratios generally translate to higher net returns over the long run, it's important to strike a balance between cost and potential returns.

Here's a table illustrating the expense ratios of various international funds:

Fund Name	Expense Ratio (Direct Plan)
Franklin India US Opportunities Fund	0.55%
Invesco Global Consumer Trends Fund of Fund	0.39%
DSP US Flexible Equity Fund	1.64%
Edelweiss Greater China Equity Off-Shore Fund	1.34%
Kotak NASDAQ 100 Fund of Fund	0.48%
Motilal Oswal NASDAQ 100 Fund of Fund	0.49%
Motilal Oswal S&P 500 Index Fund	0.72%

As you can see, expense ratios can vary significantly across global funds. While lower-cost funds may be appealing, it's important to balance the cost with the fund's potential for returns and align your decision with your investment objectives and risk tolerance. In some cases, a higher expense ratio may be justified if the fund consistently outperforms its benchmark and delivers superior risk-adjusted returns.

Developing an Asset Allocation Strategy

After choosing the suitable global funds for your portfolio, deciding on the allocation strategy is important. This determines the proportion of your total portfolio that should be invested in international securities, considering your risk tolerance, time horizon, and diversification objectives.

The percentage is a common approach to allocating your equity portfolio to global funds, and the most commonly used is 10 to 20 per cent. Nonetheless, such distribution should be periodically reconsidered and corrected due to market specifics, personal factors, and changing investment priorities.

It should be noted that international investments are long-term in nature, and as such, short-term fluctuations in the global market will introduce volatility to your portfolio. Disciplined asset allocation and rebalancing are critical to keeping your desired level of risk and return.

Monitoring and Rebalancing

Investing in a global fund is not a one-time decision but an ongoing process, needing regular monitoring and occasional rebalancing. Adapting to market dynamics and asset allocation adjustments in your portfolio, re-evaluating what you have, and making changes are essential to maintaining your desired return—risk profile.

Rebalancing is selling what has gone up and redeploying the proceeds into under-yielding or underweight assets. This method saves your desired asset allocation and improves risk management, leading to long-term returns.

Regular portfolio reviews and rebalancing can help you achieve the following:

1. Maintain Diversification: With time, as some of your assets outperform others, you may become overweight in some sectors or regions. Through rebalancing, one returns to the optimal levels of diversification, whereby the concentration risk is minimised.
2. Control Risk: You can avoid over-concentration in any investment and stay at your desired risk level by trimming crowded positions and moving assets from underperformers.
3. Enhance Returns: Rebalancing is an orderly way to take profits from winners and reinvest the proceeds in undervalued areas while taking the disciplined approach of buying low and selling high.
4. Stay Aligned with Goals: Since your investment objectives and risk appetite change, rebalancing enables you to alter your portfolio's composition to remain consistent with your goals.

The rebalancing frequency is your call and the volatility of the markets you are involved in. In the case of the investors, some go for annual or semi-annual re-balancing, whereas in others they opt for very frequent intervals, such as quarterly or monthly re-balancing.

Additionally, the implications of taxation regarding rebalancing are to be considered as selling high-priced assets may require one to pay capital gains tax. A tax-efficient, individually tailored rebalancing strategy can be created with the assistance of a financial planner.

Global Fund Selection Guided By Professionals

Picking appropriate global funds is a tricky job that requires a deep understanding of many variables, market forces, and investment strategies. While this guide offers an elaborate deliberation for the valuation and selection of global funds, seeking appropriate advice from professional financial consultants is recommended.

Financial advisors will offer individualised suggestions per your financial status, investment objectives, risk tolerance, and investment terms. They will lead you through the complexity of international investment, identify suitable global funds, and formulate a well-diversified portfolio that fits the entirety of your investment program.

Continuous monitoring of your portfolio is also provided by advisors, which includes rebalancing; thus, your investments are in line with your goals and tune with market factors. Their professionalism and neutrality can be particularly beneficial when getting ahead in the fluid global investing world.

How To Invest in Mutual Funds on Angel One?

1. Open the Angel One app. On the Home page, go to ‘Mutual Funds’.
2. Choose the Mutual Fund that you want to invest in from the various lists provided on the Mutual Fund portal.
3. Choose whether you want to invest via lump sum or SIP mode.
4. Enter the amount that you want to invest.
5. Click on the payment button to complete the payment and start your investment.

Conclusion

Global fund investing is a convenient instrument for portfolio diversification, exposure to global growth opportunities, and improvement of risk-adjusted returns.

Nevertheless, picking the right international funds involves a deep understanding of numerous factors such as geographical focus, investment style, market capitalisation, sector or thematic focus, active or passive management, expense ratios, fund manager’s track record, risk-return profile, currency exposure, and correlation with your domestic portfolio.

Through a detailed assessment of these factors and the quality of performance and consistency of the potential funds, one can build a well-diversified portfolio that matches one’s investment goals and risk-taking ability. Remember that international investment requires a kind of patient, disciplined supervision of your holdings over time and a constant reweighing of them.

Qualified financial advisors can offer helpful information during the global fund selection and ongoing portfolio management. Their professionalism and impartiality will assist in dealing with the diversities of international investing and will define a strategy for your circumstances.

Global funds are a minefield of investment opportunities if you have the right strategy, patience, and professional guidance and add to your portfolio's long-term growth and resilience. Now, apart from mutual funds and equities, there are still a lot more avenues or instruments you can invest in.

So, in the upcoming chapters, we’ll learn a lot more about alternative investing and look at some new and interesting ideas that can prove to be good investments, too.