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Do you want to own a piece of Apple, Google or Amazon – Should you do it? How to do it?

The answer is International funds of funds. This is a mutual fund that invests in other mutual funds. Instead of owning shares of companies, such a mutual fund owns units of other mutual fund(s).

Every time you click on a google search button, buy a product through Amazon, like a friend’s Facebook post or use your Apple phone, have you thought about wanting to invest in these companies. If so, you are not alone. Nearly everyone I know, who invests actively have had this urge.

If this sounds like something only reserved for millionaires with access to specialist investment management firms, then think again. You can invest in foreign markets without any additional paperwork apart from what you would usually need for investing in Indian equity mutual funds. Wondering how?

International investing simplified

The answer is International funds of funds. This is a mutual fund that invests in other mutual funds. Instead of owning shares of companies, such a mutual fund owns units of other mutual fund(s).  An International fund of funds operates in India but will invest money in mutual funds that operate in a different country. You get to invest in the fund in Indian rupees without having to go through hassles of forex rules.

Why should you consider an International fund of funds?

There are broadly 3 reasons:

  1. Benefit by investing in the growth of renowned multinationals which are not listed in India.
  2. Take advantage of the difference in currencies which can be a source of gains on its own or de-risking strategy.
  3. Diversify your portfolio beyond the Indian stock market.

How do International funds help you gain from currency fluctuations

Let’s say you bought a US dollar today for Rs. 71 and just kept it. The rupee has depreciated on average by about 5% each year against the US dollar since 1990. If we assume a 3.5% depreciation of the rupee going forward, you are likely to be able to exchange your dollar for Rs. 84.3 in about 5 years.

The same growth would also benefit you if you were to invest in a fund that helps you invest in the US market.

Let’s consider an example: 

Assume you start with Rs. 10 lakhs of investable money in 2019, and that the prevailing USD/INR rate is $1 = Rs. 71. By investing this money in a US fund of funds, the Rs. 10 lakhs gets converted to ~$14,000, as per the above exchange rate. If we assume that this money stays invested for 5 years and grows at 6% per year, your portfolio will be worth $18,850 by 2024. Also assume that when you redeem the portfolio in 2024, the USD/INR rate is $1 = Rs. 84.3. As a result, you get Rs 15.9 lakhs back due to a combination of the growth of your portfolio and the dollar’s increased value relative to the rupee.

As an investor, you will benefit from both the growth in international equities and the rupee depreciation.

Numbers rounded off.

How do International fund of funds help you diversify?

International fund of funds help you gain a certain degree of freedom from depending on just the Indian stock market and its performance. Quite often markets in another country might be doing well whereas Indian equities might be performing poorly during a particular time.

International fund of funds help you address such challenges and can be considered a form of diversification. In finance jargon, investing in two non-correlated assets with similar returns is always better than investing in one asset. Remember, diversification does not give you a higher return. It gives you a smoother return and investing journey.

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