In the last couple of years, index funds and international funds have attracted the attention of investors. These funds allow you to invest in well-established and progressive companies both in India as well as abroad.
Most investors, for years, have depended on actively managed funds with their focus solely on Indian equities to create wealth for them. So why the need to change the strategy now to create a blend of equity diversified, index, and international funds?
Index funds’ investment is based on market capitalization. The strategy of these funds is to passively manage the portfolio and mirror the indices created by NSE or BSE based on market capitalization. For instance, if today the weightage of HDFC in Nifty 50 is 10%, then the index fund will also have 10% of its portfolio in HDFC. The fund will rebalance its portfolio accordingly on a regular interval and mimic it with the weightage of the index. The expense ratio of index funds is low compared to other equity funds, as there is no need for active fund management and research. Nifty50 Index Funds, Sensex Index Funds, and NIFTY Next 50 Index Funds are some popular index funds.
View on index funds
Index funds can generate good returns for investors, but their consistency to do so depends on the maturity of the economy and depth in the stock market. Developing countries like India have the potential to improve their business and perform well across various sectors. Companies with higher market capitalization have more chances to grow at a faster rate. Having a combination of both index and equity funds can help grow your portfolio in a better way. New or low-risk investors can have a higher allocation to index funds whereas moderate to high-risk investors might have 15-20% allocation in index funds.
International funds allow the investors to participate in companies abroad and diversify their investment across different countries. These funds invest in a basket of equity funds based on different themes or countries. At present, funds investing in the US, China are preferred. Through these funds you can invest in international companies like you can invest in companies like Alphabet (Google), Apple, Microsoft, Amazon, Facebook, Samsung, Tencent, Alibaba, etc.
View on international funds
Investors who have built a reasonable allocation in Indian equity funds and have moderate to a high-risk profiles can look at international funds. These types of investors may allocate 10% of the portfolio to international funds. Amateur investors who have a low-risk appetite may avoid it at this stage.
Both international and index funds have performed well in the past and have the merits to be a part of your portfolio. However, one is advised to add them gradually in their portfolio and to continue to diversify his/her portfolio across different market capitalizations and sectors which will reduce the overall risk and generate a good long-term return.