Foreign Funds

A foreign fund is a type of mutual fund that invests in companies outside of the investor’s country of residence.
Foreign Fund
3 min
08-May-2024

You may have heard about "foreign funds” but what exactly are they, and why are they important? Foreign funds are mutual fund schemes that act like bridges connecting you to financial opportunities in other parts of the world. They let you invest your money into companies that are not in your country. So, in simple terms, foreign funds help you spread your investments beyond your local area.

Understanding foreign funds is not just about being smart with your money, it is about opening yourself up to a world of opportunities and making the most of what the global economy offers. Let us dive deeper into the significance and meaning of foreign funds.

What is a foreign fund?

A foreign fund, sometimes known as an international mutual funds, is a vehicle that allows investors to pool their money and invest in enterprises based outside of their own country. Mutual funds, exchange-traded funds (ETFs), and closed-end funds are some of the investment formats covered by these funds. Unlike domestic funds, which primarily focus on firms in the investor's own country, international funds cast a broader net, looking for possibilities in the global economy.

Understanding a foreign fund

Foreign funds provide Indian investors with access to worldwide markets, potentially increasing returns and diversifying portfolios. Diversifying across borders allows investors to reduce the risks associated with country-specific economic volatility while also capitalising on growth potential in varied economies. Foreign funds provide a variety of investing alternatives, expanding perspectives and increasing possible rewards.

Risks associated with foreign funds

Below mentioned are the risks associated with Foreign Funds:

  1. Currency fluctuations: Foreign funds are vulnerable to currency changes, which can affect the value of assets. When the value of the investor's native currency fluctuates relative to the currency of the overseas investment, the effect on returns might be positive or negative.
  2. Economic shifts: Investing in overseas markets exposes investors to economic changes in those nations. Changes in economic conditions, such as inflation, interest rates, and GDP growth, can all have an impact on foreign fund performance.
  3. Geopolitical tensions: Political unrest or wars in other nations can disrupt markets and reduce the value of investments held in foreign funds. Geopolitical conflicts can create uncertainty and volatility, affecting investor returns.
  4. Regulatory risks: Investment regulations differ by country, which might offer risks for international fund investors. Changes in legislation or policies can have an influence on the operating environment of enterprises that receive foreign investment, affecting their performance.
  5. Market liquidity: Some overseas markets may have lesser liquidity than local markets, affecting the ease with which investments are bought and sold. Lower liquidity might result in greater bid-ask spreads and make it difficult to execute deals at the required price.

Difference between Debt Foreign Funds vs Equity Foreign Funds

Debt foreign funds invest largely in government or corporate debt instruments issued by entities located outside the investor's home country. These products provide fixed-income options and may be appropriate for investors looking for more consistent returns with less risk.

Equity foreign funds invest in stocks of firms in foreign markets, providing exposure to global equities. These products offer prospects for capital appreciation and may appeal to investors seeking growth beyond home markets.

  1. Risk profiles: Debt foreign funds often have lower risk profiles than equity funds since they invest in fixed-income assets with guaranteed returns. Equity funds, on the other hand, incur a higher level of risk but have the potential to provide bigger returns over time. Both, though, allow for SIP and Lumpsum Investment in them.
  2. Diversification benefits: Both debt and equity foreign funds provide diversity by distributing investments across many geographies and asset types. Investors can select among these funds based on their risk tolerance, investing goals, and the desired amount of exposure to overseas markets.
  3. Asset allocation: Some foreign funds may combine debt and equity assets to provide balanced exposure to both fixed-income and equity securities. These asset allocation funds look to diversify while limiting risk, making them suitable for investors with a moderate risk tolerance.

Foreign funds vs. Global funds

  1. Scope of investments: Foreign funds generally invest in organisations located outside of the investor's home country, providing access to certain international markets. Global funds, on the other hand, invest in firms all around the world, including those in the investor's nation.
  2. Diversification benefits: Both foreign and global funds provide diversity by distributing investments across many areas and marketplaces. Foreign funds are purely concerned with overseas markets, while global funds invest in both local and overseas markets.
  3. Risk exposure: Foreign funds expose investors to risks associated with foreign markets, such as currency fluctuations and geopolitical tensions. Global funds, although still exposed to these risks, also contain exposure to the investor's local market, which provides some familiarity and may reduce total risk.
  4. Investment objectives: Investors may select foreign funds to expressly target opportunities in overseas markets or to diversify their portfolios outside national borders. Global funds, on the other hand, cater to investors looking for wide exposure to both domestic and international markets.
  5. Performance factors: Currency changes, economic conditions, and geopolitical events all have an impact on the performance of international and global funds. Understanding these elements and their influence on various markets is critical for analysing the possible returns of these.

Conclusion

Foreign funds provide Indian investors with an attractive opportunity to explore other markets and diversify their investment portfolios. While it may seem difficult, the opportunity for better returns and resilience to local economic downturns is immense. Remember to always compare mutual funds across various factors before investing. You can make smart decisions by learning about the techniques, risks and distinctions related to foreign funds, guiding your financial futures towards growth and stability.

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Frequently asked questions

What is an example of a foreign fund?
A fund which invests in securities outside of the investor's home country can qualify as an example of a foreign fund or an international mutual fund. These funds offer exposure to global markets and typically invest in a diverse range of assets, including stocks, bonds, and other financial instruments, across various regions and economies.
What is a foreign investment fund?
A foreign investment fund invests in enterprises outside of the investor's native country, giving them access to international markets and opportunities.
What is a foreign stock fund?
A foreign stock fund invests largely in the stocks of firms located outside of the investor's home country, with the goal of capital appreciation and diversification.
What do you mean by international fund?
An international fund, often known as a foreign fund, is an investment tool that distributes assets to firms located beyond the investor's native boundaries, providing portfolio diversity and the possibility for higher returns.
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