How Much Should You Allocate To International Funds?

Many investors can get benefited from investing in international funds. It gives investors a chance to invest in distinctive and captivative companies which are not available in the Indian stock market. Once you have decided to invest in international funds it should be more about portfolio diversification and not returns maximization. As an investor one should invest in international funds only after you have diversified your portfolio domestically well. Our Indian markets have a low correlation compared to some international markets. This brings down our portfolio volatility and gives us good diversification.

In the last 10 years, Indian and US markets have generated a somewhat similar return for their investors. The Dow Jones Industrial has generated an average return of 15.3% whereas, BSE Sensex has generated a CAGR of 10%. As we can see the US markets have generated more returns than the Indian stock market.

Now talking about the allocation, your investment should be limited and your focus should be more on our Indian markets and have limited exposure in the International funds. Maximum 15% should be allocated in the international funds and one can gradually increase their investments up to 25% and enjoy a good geographical diversification. For beginners, you can allocate 10% of your capital towards these funds. This can serve as a good starting point for investing in the international markets.

You might be thinking “I’ve got enough knowledge”, but which fund you should invest in? I have got you covered. There are several funds to choose from, that doesn’t mean you fill up your portfolio with several funds. Choose funds based on your goal and time frame. Think of these funds as a means for diversifying your portfolio and not your core portfolio.

A maximum of 2 to 3 funds would be good enough for a novice and I believe in the beginning one should invest in a developed market like the US market as their first choice. Within the US markets, you can choose from S&P 500 based funds or Nasdaq based funds, the latter being a bit riskier. Those who don’t want to invest in the US markets or have already invested in it can try their hands at investing in Japan, European or Brazil markets.

Many Indian AMC’s have launched some new international funds, these types of funds are called funds-of-funds mutual fund schemes in which one fund collectively invests in international funds.

Your Risk appetite plays an important role in your whole investing journey. Based on the risk profile you can choose from active and passive funds. Once you have decided to invest in a developed market you have two options to choose from active funds and passive funds. Active funds include index funds or ETF’s. Being a mature market, passive fund managers find it difficult to beat the benchmark consistently.

It all depends on your risk-taking ability and the period you are invested for. Invest longer in a SIP mode for better returns and beat the inflation in style. I suggest one invest more in emerging markets and a small part can go to the developed market to maximise returns and diversification.

The views expressed above are just for educational purposes. Please do thorough research before investing. Happy Investing!

Writer - Mayank Choudhary