International funds may look great from the diversification point of view, risks such as currency risks, portfolio concentration risks and operational risks.
Investors often look towards international mutual funds as a means of diversifying their portfolio but there are several risks that are present in these funds. Unlike a normal equity oriented mutual fund there could be a situation where the individual might not even know about the different dimensions of risk that they might be taking. It is essential that every investor first take a look at the risk element so that they are not caught off guard at some later stage after the investment has been made.
Here is a closer look at some of the risk that are present in these funds and how an individual should look at them.
Foreign currency risk
Most investors do not give much thought to the foreign currency risk that arises in case of international mutual funds when they are bought in the country. This is because the investor makes the investment in rupees and they also get back the investment in rupees so the foreign currency angle might completely slip from their minds. However this is something that needs primary attention because this is present at every stage of the investment. The moment the fund converts the investment into the foreign currency the risk starts and the impact of the currency changes would be visible in terms of the changes that are seen in the net asset value of the fund. Since the amount of the value of the fund has to be converted back into rupees for the purpose of display of the net asset value the foreign translation becomes a part and parcel of the process. It could be that there are days when the foreign currency changes are more than the changes to the value of the entire portfolio and hence this is something that will have to be considered by every investor.
Delayed details
In case of a local mutual fund the net asset value at the end of the day reflects the latest position that is seen in the portfolio as even the same day changes would be visible in the value. In case of an international fund one would have to be alert to the entire situation and understand the time that would elapse and when a particular change would be reflected in the value of the fund. For example if this is US based fund then the US markets close late at night in India so the value that is seen due to the changes on a particular day would actually be seen in the net asset value later as the calculations are made. This could lead to some confusion for an investor who might make some buy or sell decision based on some other assumption but it is necessary that they take time to know the exact situation.
Portfolio concentration
There are times when the investor might be looking to reduce the risk and diversify by taking an international fund in their portfolio. However they need to be careful in making the selection of the fund because it could be that they end up doing the exact opposite of what they intended. There are several funds that are country specific or geography specific like China funds or European funds. If there is some crisis that hits a particular place then there is the chance that the risk could turn out to be concentrated in a single place and the fund would actually reflect this situation. Thus it could end up magnifying the impact that is felt by the investor because on one hand there is a sharp change in the portfolio and there might not be any cushion present to reduce the impact of the fall. (source - moneycontrol)
No comments:
Post a Comment