November 27, 2022

Paull Ank Ford

Business Think different

Why Index Funds Are A Good Option To Invest Internationally?

index funds: Why index funds are best bets if you want to invest  internationally - The Economic Times

There’s no doubt that India is one of the fastest growing economies among other developing nations. India represents 3% of the global GDP and an almost similar percentage in terms of global stock market capitalization. What a lot of Indians are not aware of is that on the international front, a lot of disruption and innovation in traditional sectors is creating investment opportunities in foreign markets. The scope for such investment opportunities in the domestic market is a lot less. To explore such globally trending opportunities, investors need to get more acquainted with these megatrends that are emerging outside India. 

Before investing in international markets, what investors need to know is that not all foreign markets can perform equally in tandem. There are times when the US has outperformed others and then there are moments when Europe is the global market leader. If you invest in an international fund that invests in different international markets, you not only reduce concentration risk but also assure that your portfolio is well-diversified. 

One reason to invest in international markets is that they can act as a hedge against rupee depreciation. If there is an economic downturn, your domestic portfolio may suffer but your international portfolio may generate higher profits. 

One way to invest in international markets is through index mutual funds that track international indices as their benchmark. 

What are Index mutual funds?

Mutual funds are broadly categorized as actively managed funds and passively managed funds. Actively managed funds are those mutual funds that have a fund manager actively trading its underlying securities to generate optimum returns. Passive funds on the other do not depend on the fund manager’s trading decisions for income generation. They try to generate returns by mimicking the performance of the underlying securities of their benchmark. Index funds are such passive funds. 

Benefits of investing globally with Index mutual funds

Although India is a fast emerging nation, it is no match to the advanced technologies that are currently bringing in innovation on the global front in terms of AI (Artificial Intelligence), EV (Electric Vehicles), e-commerce, online streaming services, etc. When you invest in an index mutual fund that tracks a global index, you get an opportunity to invest in companies like Google, Netflix, Amazon, Facebook, etc. These technologically advanced companies are not listed on the Indian stock exchange and if you do not want to miss on these opportunities then you may consider investing in index funds tracking global indices. 

The portfolio of the index funds remains unchanged unless there is any rejigging witnessed in the index. Only then, the fund manager may make the necessary changes in the portfolio composition of the index fund to ensure that there is no tracking error. A lot of investors aren’t comfortable with the fact that the portfolio of securities in which they invested may or may not have the same stocks and that there can be an addition of new stocks that they aren’t willing to invest in. Such investors may consider index funds as these funds only invest in stocks that comprise their underlying benchmark in the same proportion without changing the portfolio composition. 

Index funds in general, be them tracking domestic indices or foreign ones, do not have high management costs. They have a feasible expense ratio considering they adopt a passive investment strategy, and this makes them a far more cost effective investment tool. 

Also, such global index funds give investors exposure to promising international leaders and give them a chance to benefit from the growth and success of such companies.