A regional mutual fund invests in securities from a specific geographic area like Latin America, Europe, or Asia. It typically holds a diverse range of companies within that region.
Mutual funds come in different varieties — with each type of fund offering certain unique advantages to your portfolio. You may be quite familiar with the different types of mutual fund schemes available in the domestic market. However, in the international market too, you can find a similar range of funds to choose from. One such category of investments is regional funds.
In this article, we take a closer look at the meaning of regional funds, how they work, the types of regional funds and more.
What is a regional fund?
Regional Funds are a type of mutual funds that invest in the financial securities markets of specific geographical regions. Some examples of such regions include Europe, Latin America, the Asia-Pacific region, Nordic countries, the Middle East and more.
These mutual fund schemes typically invest in the shares of companies that are based in or operate from the region the fund focuses on. Alternatively, they may also focus on specific sectors in the region’s economy. For instance, a mutual fund scheme may focus on the energy sector in Nordic countries to tap into the green energy revolution.
How do regional funds work?
Regional funds work just like domestic mutual funds. The capital from different investors is pooled together to form a common source of funds. This common pool of capital is then used to purchase stocks and securities in the target region based on the overall investment objectives of the regional fund.
These funds may invest in securities like equity stocks, government bonds, corporate bonds, high-yield bonds, money market instruments and other specialised securities from the region. The fund manager typically decides which securities to invest in.
Thereafter, depending on how the NAV (Net Asset Value) of the regional fund changes during the investment tenure, you may earn capital gains or suffer capital losses. These gains will be taxed as per the Income Tax Act, based on the type of regional fund (whether equity-oriented or debt-oriented). The dividend, if any, earned from the regional funds you invest in will be taxed as per the income tax slab rate applicable to you.
Different types of regional funds
Regional funds can be classified into different categories based on various parameters like the investment style, the primary type of investments and more. Let us explore the different types of regional funds available to investors.
- Based on the investment style: Like domestic mutual funds, regional funds can also be either active or passive schemes. Active schemes are those that are actively overseen by professional fund managers — who decide which securities to invest in, the asset allocation for these securities and when to redeem them. Passive regional funds track an index, so they require less intense monitoring.
- Based on the type of investment: Regional mutual funds can also be classified as debt-oriented or equity-oriented funds, depending on the market that they primarily focus on. Investors can choose between these types of regional funds based on their risk tolerance, investment goals, investment horizon and expected returns, among other things.
- Based on the sector or theme: Regional funds may also have certain sectoral or thematic objectives. For instance, a fund may aim to invest in emerging markets and regions or sustainable companies within a specific geographical region. These funds can offer some diversified exposure to your portfolio but ensure that you do not increase the concentration risk overall.
Examples of a regional fund
Based on their area of focus, we have different examples of regional funds. For instance, some mutual fund schemes may choose to invest in companies from a specific country or group of countries. Some examples of such funds include European funds or Asia-Pacific funds.
You may also find regional funds that concentrate on specific regions within a larger country. For example, a mutual fund may focus on the technology sector in the USA’s Silicon Valley, while another may invest in industrial companies in Western Europe.
How regional funds help close gaps in capital access?
One of the most overlooked aspects of regional mutual funds is how they help businesses in specific countries or areas obtain access to capital more easily. Let us delve deeper into this aspect of region-based mutual funds.
The significance of regional funds
Startups and small businesses in many regions often struggle with the issue of access to capital. This stems from various reasons like lack of credit access, inability to meet the strict eligibility criteria for loans and generally inadequate credit penetration. Regional funds set up by governments or private mutual fund houses help work around this issue by improving the flow of capital to businesses in such regions.
For instance, mutual fund schemes backed by government entities address the economic challenges in specific regions and improve the inflow of funds for developmental purposes. Similarly, regional funds launched by private equity firms also adopt flexible investment strategies to gather financial capital from investors interested in regional companies.
Regional funds: Opportunities and challenges
Regional funds also come with a unique set of challenges and opportunities. The key issues that these mutual funds need to overcome include the following:
- Accurate assessment of risk in different regions
- Compliance with the regulations in the target regions
- Managing currency exchange rate fluctuations
- Understanding and adapting to regional market dynamics
- Ensuring sufficient market liquidity
Alongside these challenges, regional mutual funds also present diverse opportunities, such as:
- Diversification across different geographical regions
- Effective risk mitigation in investors’ portfolios
- Improved capital access for businesses in various regions
- Easier access to international financial markets
- Potential improved returns depending on the region in focus
How regional funds support the growth of small businesses?
Small businesses in various regions find it difficult to develop beyond a certain level due to a lack of capital. As a result, they are forced to resort to high-interest loans and credit facilities in the unorganised sector. This further cuts into their margins and prevents growth.
Regional mutual funds set up by government-backed entities or private equity firms can help turn this around by facilitating improved capital access, as outlined above. This, in turn, is crucial for the growth of small businesses in various regions that these funds focus on.
Why regional funds are important?
Regional funds are important not just for small business growth and economic progress in the target region, but also to investors who are keen on diversifying their portfolio beyond domestic markets. If this is one of your primary goals, regional mutual fund schemes can be an important part of your portfolio as they help you diversify into other regions and easily access international investments without incurring steep investment costs. The favourable risk-return proposition combined with the affordability of investing in these funds makes them important to investors in different stages of their financial journey. [1]
Regional funds vs International funds
Regional funds are often mistakenly referred to as international funds. This is not entirely wrong because regional funds are a type of international funds. That said, the latter is a broader category of mutual funds that invest in foreign securities markets. Within the category of international funds, there are different sub-categories like regional funds, broad foreign market-focused funds and country-focused funds.
Things to keep in mind before investing in regional mutual funds
Before investing in regional funds, it is essential to be mindful of some important aspects. Here is a list of some such key factors to consider.
- The region’s economy: Understand the economic climate in the region and be mindful of the stability, the growth prospects and the geopolitical and economic risks in the area. This will help you get an overall perspective of the country or region.
- Currency risks: Factor in the currency exchange risks, if any. This is because currency fluctuations can significantly impact your overall returns from regional funds, especially if the currency is volatile.
- Regulatory environment: The regulatory standards and economic policies in the region concerned also matter greatly. Understand the legal and regulatory environment and get to know the rules for foreign investors, so you can avoid unexpected risks.
- Liquidity: You must also be clear about the liquidity constraints, if any, in the market that your preferred regional funds target. This will help ensure that you do not have trouble redeeming your investments when needed.
Conclusion
Now that you know what a regional fund is, you can compare mutual funds from different categories, see which schemes are aligned with your goals and make informed investment choices. On the Bajaj Finserv Mutual Funds Platform, this becomes easier because you can check out over 1,000 different mutual fund schemes. What’s more, you can also shortlist your choices and immediately make lumpsum or a SIP Investment in the funds you select.
