Prior to yesterday, I did not know that such a thing even exists. I was aware that there are people in our country too who invest in International markets, but I always thought that this is something reserved for the elites only.
Actually I was reading an article in the NY Times last Sunday on ‘China Aims to Spend at Least $360 Billion on Renewable Energy by 2020’, when it struck to my mind if I can invest in China.
Did some digging in Moneycontrol and Value Research and I was amazed to see that not only China, there are plenty of funds available which allows common investors to invest in markets around the world in the same SIP manner as many of us do in our own market.
So, does anyone of us here are invested in any such International Funds or any kind of prior experience, good or bad with these instruments ? This looks pretty interesting to me!
To add to your question, I have always been interested in exploring debt funds investing in risk-free foreign treasury bills/deposits/bonds of stable countries, where interest rates are significantly higher than our domestic rates. Wanted to know if it is possible or not. If yes, then how?
In my limited experience with international mutual funds returns are heavily dependent on FX rate so even if respective companies are doing well you might not get same returns.
Also I believe returns are not tax free and taxed like debt funds.
Risk is directly proportional to interest Rate, so if it’s less risky then it will mean lower interest rate. Add to that forex conversion and trading cost along with exchange rate and interest rate voltality, taxation rules, is it worth?
Hypothetically say, if you can identify a multi bagger in foreign market, can’t you identify one in local markets? Trading costs are high abroad, add to that uncertain taxation rules, forex and other voltality, is it worth?
Here are my two cents,
I will say that there is place for US focused equity funds as it provides exposure to word’s well managed and innovative Corporations and at the same time provides hedge against INR currency risk, though both of these will materialise in fairly long run. But it comes at cost, Cap Gains are treated as Non-Equity for Tax purposes and add to that is forex volitility exposure, also the returns will be much lower than Indian equities.
For Debt International funds, the returns will be much lower, low risk in bond comes with lower returns, and again added to that is Forex risk.
There are multiple funds which do this and I’m listing them below, however, I like the PPFAS because it’s still treated as a Equity Fund - which means the profits are tax free after an year. All the other funds, would be treated as Debt Funds, and LTCG will be applicable after 3 years.
Some of the funds -:
Parag Parikh Long Term Value Fund
Kotak Global Emerging Market
ICICI Prudential US Bluechip Equity Fund
Risk is a relative concept and sometimes play on our minds more than on the ground. So if I say that I am looking for a debt instrument instead of equity, I am sizing up the risk as lower for debt instruments. But for me Indian risk-free rate is paltry and will barely make me richer. Now contrast it with a US investment bank dealing in debt instrument where interest rate would be barely above 1%. And although India provides the bank with substantially higher yield, it still may not be tempted to invest in Indian debt instruments due to higher country risk (relative to US or other developed geographies).
Similarly, if we evaluate risk on the equity side too, global investment banks would be comfortable only in investing in blue-chip Indian companies, knowing very well that the checks and balances of Indian accounting system are not as robust as US GAAP (among other considerations). Believe it or not, if someone has been investing with Indian equities for fairly long period of time then surely he/she must have more than once allocated funds to a company fudging its numbers. That is how prevalent it is. And largely these frauds go undetected. But that’s a hidden risk we hardly account for, yet, a global banker would take it very seriously.
Coming to your question about risk, I feel investing in debt instruments in a country where deposit rates go up to as high as anywhere between 10-20 percent can be an option worth considering. In terms of risk, it would position me somewhere between the low risk low yield Indian debt instruments and high risk high yield Indian equities. This band includes countries like Brazil (11.7%) and Vietnam (12.7%) which are stable emerging economies. I agree with you that forex and tax consideration would be important to evaluate. But we will have to see if inflation can compensate for it. For eg. Argentina experiences inflation of around 20%, and to check this, economic reforms would bring in a hike in the lending rates. Since, India experiences currently an inflation of around 4%, it would not be too hard on our pockets if we are gaining a yield of 12-15 percent from a debt instrument. So what I am trying to explore is that can we earn higher by investing in markets offering better yields on debt instruments while I spend in India with a much lower inflation rate? If there is an international debt fund doing that, I would like to consider it.