Steps to Create a diversified portfolio with international mutual funds
Mutual fund investments are known for being the preferred investment avenue that can help you with accumulating wealth. But just selecting the mutual fund scheme is not enough. You also need to select the right variant of the mutual fund scheme. If done right, mutual funds investment can help you in accumulating wealth for the future. If you are serious about investing in mutual fund schemes, you need to do things like determining your investment objective and selecting the right type of mutual fund scheme. One of the different types of mutual fund schemes is international mutual funds.
What is an international mutual fund?
International mutual funds are the type of mutual funds that are known for investing in foreign companies. Also referred to as overseas or foreign funds, investing funds in this mutual fund can result in higher risk exposure, but there are also chances of higher returns. Generally, international funds are preferred as an alternative to long-term investment. International funds are known for adding an element of geographical diversification to the mutual fund.
Who are they suitable for?
International funds are known for attracting investors with several features such as diversification, varying economic cycles, and broadening experience and expertise. But international funds are not suitable for passive investors as you are required to be careful and carry out the market study continuously. Before investing, you need to be sure of your investment goals, i.e., both short-term and long-term. You need to check the track record of performance as they will help you choose a fund that suits your needs.
What are its features?
- They come with risks:
Firstly, it is important to note that international funds come with risks. The currency exchange rates are known for fluctuating every day. For example, you opted for an international fund that is based in the US. When the currency exchange rate of the rupee falls against the dollar, the NAV of your portfolio rises. On the other hand, in case the currency exchange rate of the rupee experiences a boost, it results in you getting lesser rupees per dollar, and, as a result, the NAV falls.
- These funds come with a scope for better market returns:
When you opt to capitalize on more than one economy at the same time, your portfolio has the opportunity to earn higher returns. Apart from attempting to mitigate risks by diversifying funds, overseas investing can also help in boosting the quality of your portfolio.
- They also come with dual market risks:
A fluctuation in the market or sector overseas can also have an impact on the performance of the international mutual fund. Therefore, before opting for an international fund, you need to carry out a lot of research to make the right choice.
- You need to be vigilant constantly:
Apart from looking at market conditions while researching a country, you also need to look at the social, political, and economic conditions in different countries. That’s because they can impact mutual fund performances differently. So, investors must keep track of the political and social situations of a country regularly.
Steps to create a diversified portfolio:
In the world of investment, the process of diversifying funds is of the utmost importance. Diversifying means spreading your investments to different sectors and assets. In simple words, diversification avoids putting all your money into a single asset. So, even if one of the assets were underperforming, the performance of others will cushion the loss of the underperforming one. Here are the steps to follow to create a diversified portfolio:
The first step that needs to be taken for creating a diversified portfolio with international mutual funds is research. Research is important because you will not be aware of how markets in a particular country work. The research will help you to understand how the market works. Carrying out research will also help identify the prevailing trends and the overall psychology of the market. Through a careful study, you will get a clear idea about which equities and funds will perform well in the market and can make investment choices accordingly.
In the case of mutual funds generally, once you get a hand on a well-performing mutual fund scheme, the next step is to invest. Luckily, fund allocation in international funds is no different. You can opt to do so either by directly investing through an asset management company (AMC), through online investment platforms, or with an investment advisor.
International funds are known for being taxed like debt funds. Hence, if you were to hold on to funds for more than three years, your returns will be taxed at the rate of 20% post-indexation.
If you are investing for the long term, this variant of mutual funds is one of the recommended ways to diversify your portfolio and spread market risks.