Diversifying Investment Portfolio: How much should you allocate to international funds?

It is advisable to allocate 10-15% of your total funds into international mutual funds, which can be spread across regions.

Diversifying Investment Portfolio How much should you allocate to international funds

Investing in foreign funds is a great way to diversify your investment portfolio. Indian markets have a low correlation with international markets, lowering portfolio volatility. While most financial advisors suggest funding between 15 to 25% into international funds, it depends on your risk appetite. 

Investing in international stocks also protects against the depreciation of the rupee. When you invest in international funds, it’s more about diversification and less about return maximisation.

How Much To Allocate To International Funds?

While we are still on diversification, the aim is to start small. If you are just getting started with international investment, investing 10% of your total portfolio is a safe bet.

If you have prior experience, then you may consider investing between 10 to 15%. In some cases, a hefty 15 to 25% of investment can also be considered if you become more exposed and understand the volatility of the market better.

A key point to note here is investments should be made gradually, and not all at once. 

Click here to read on the best debt mutual funds in India

What International Funds Should You Invest In?

With the entry of numerous personal finance apps that let you have direct access to national and international markets, people have become more active with their investments.

With so many investing options available, confusion about which one to choose is inevitable. However, just because a market has become easier to invest in, does not mean it is the best option for you. Mr Anil Monga, MD Emmsons International Ltd., on an interview with BSE India, advises investors to take a look at the company's profile and study their fundamentals to make a safe investment.

When considering the international market, the best choice is to look at developed countries. Considering that 70-80% of your funds are invested in the national market, you should choose funds focused on developed countries that have a low correlation with the Indian market. This will give you protection against the poor performance of funds and minimise risk. 

One such market is the US market. Not only do you get access to global companies when investing but also the return is higher with better interest rates. One of the better options in the US market is S&P 500-based funds because the index represents the largest 500 companies in the country. For someone with a risky appetite, Nasdaq-based funds may be suitable.

Even though investment in the US funds is enough, should you want to explore more, you can consider a bit more diversification. 

Another alternative for foreign investments is to try out the Asia-Pacific region, or China and Japan. You can also consider the European or Brazilian markets. However, make sure you understand what you are getting into. 

Yet another option is the global mutual funds, such as the Vanguard FTSE All-World Ex-U.S. ETF (NYSE: VEU). It is one of the most popular choices globally.

Click here to read how returns on mutual funds taxed

Active or Passive International Funds?

When investing in international funds, especially those in developed markets like the US, consider passive international stocks. These funds give out higher returns because of their long-term nature. According to S&P Indices Versus Active (SPIVA) report, nearly 90% of the passive index funds performed better than active funds over a 20-year period.

Investing in mutual funds has also become a household topic these days. As more and more market options become available, our options also increase. However, before making investments, you must plan why you are investing and how much you want to invest. Remember that these investment strategies may not work in the same way for everyone. 

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