Navigating Emerging Market Mutual Funds: A Beginner's Guide

New to investing in emerging market mutual funds? This beginner's guide is your compass to navigate through the complexities.
Emerging Market Mutual Funds
3 min
02 March 2024

Investing in mutual funds is a popular way to grow wealth, but have you heard about Emerging Market Funds? In this article, we'll explore the basics of emerging market funds, their benefits, risks, and who should consider investing in them.

What are Emerging Market Funds?

Emerging Market Fund are mutual funds or exchange-traded funds (ETFs) that invest in stocks of companies located in emerging market economies. These economies are characterised by rapid economic growth, industrialization, and evolving financial markets. Examples of emerging markets include countries like India, China, Brazil, and Russia. They can give potentially high growth but also carry higher risks. Investing in an emerging market mutual funds helps reduce risk by spreading investments across various stocks and countries.

How do Emerging Market Mutual Funds work?

An emerging market mutual fund spreads investments across different industries, countries, and company sizes. For instance, if 25% of the fund is allocated to China, it may invest in sectors like petroleum, banking, and power, focusing on mid-sized companies. This diversification helps manage risk and tap into the growth potential of the economy.

Emerging Market Funds aim to benefit from the growth opportunities in developing economies. They offer various options, including equity and debt investments, allowing investors to diversify their portfolios. Investors can choose between active and passive funds to gain exposure to emerging markets across different market segments.

Factors to consider before investing in Emerging Market Funds in India

1. Risks:

  • Inflation risk: Emerging markets may be prone to high inflation rates, which can erode the real value of investments.
  • Currency risk: Fluctuations in currency exchange rates can impact the value of investments in emerging market funds.
  • Liquidity risk: Some emerging market securities may have lower liquidity, making it challenging to buy or sell them quickly.
  • Institutional risk: Emerging market economies may lack robust regulatory frameworks and institutional infrastructure, posing risks to investors.
  • Political risk: Political instability and changes in government policies can affect the performance of emerging market investments.

2. Expense Ratio:

Consider the expense ratio, which is the annual fee charged by the fund company for managing the fund. Lower expense ratios translate to higher returns for investors.

3. Tax:

Emerging market mutual funds incur capital gains tax, which depends on the holding period. Based on the holding period, the units may be subject to STCG (Short Term Capital Gains) or LTCG (Long Term Capital Gains). The holding period refers to how long you keep your money invested in the mutual funds and ends when you sell your funds.

  • Long Term Capital Gain (LTCG): If you hold your investment for more than a year, it qualifies for long-term capital gains tax. The first Rs. 1 lakh of gains are exempt from tax, and any gains above that threshold are taxed at 10% without indexation benefits.
  • Short Term Capital Gain (STCG): If you hold your investment for up to 1 year, it is considered short-term capital gains and subject to a 15% tax rate.

Who should invest in an Emerging Market Fund?

Emerging Market Funds can be suitable for investors with a higher risk tolerance seeking potential growth opportunities. Younger investors with a long-term investment horizon may benefit from the growth potential of emerging market economies. However, it's essential to consider your risk tolerance, investment goals, and portfolio diversification strategy before investing in emerging market funds.

In conclusion, emerging market funds offer investors exposure to dynamic economies with high growth potential. While they come with risks, they also present opportunities for higher returns. By understanding the factors influencing emerging market investments and considering your investment objectives, you can make informed decisions about integrating emerging market funds into your investment portfolio.