The most important advantage of mutual funds is diversification. This diversification can be on the basis of asset allocation, exposure to different sectors or industries, or even across virtually risk-free securities. There is another important aspect of investing which is finding the right investment opportunities that suit one’s investment objectives and the risk-return expectations. Emerging market funds are one of such opportunities that the investors can benefit from in the form of good returns by investing in markets of other countries.
Here are all the details of the emerging market funds that can help you make sound investment decisions. Read on!
Emerging market countries
To understand emerging market funds, it is firstly essential to understand the meaning of emerging markets or countries that are considered to be part of such markets. Emerging markets are essentially developing countries in the world that are considered to be on a fast track to be developed countries. India ranks high among such counties along with Russia, China, and Brazil. Some of the emerging markets around the world are,
| China India Indonesia Korea Malaysia Pakistan Poland South Africa | Philippines Taiwan Thailand Brazil Chile Colombia Qatar Turkey | Mexico Peru Russia Czech Republic Egypt Greece Hungary UAE |
What are emerging market funds?
Emerging Market Funds refer to a type of equity fund or ETF that channel investments towards the stock markets of developing countries. These countries are in the process of transitioning towards becoming fully developed economies. Some of the leading emerging markets globally include India, Brazil, Russia, and China. While these markets may present opportunities for high returns, they also come with higher risks.
To mitigate these risks, investing in an Emerging Market Mutual Fund can offer diversification benefits by limiting exposure to a single stock or country. By spreading investments across a range of stocks and countries, investors can potentially reduce the impact of any negative events in one market on their overall portfolio. This strategy can be particularly useful for investors seeking to benefit from the growth potential of emerging markets while also managing risk.
How do emerging market funds work?
The investments in emerging market funds are in top performing companies or stocks of emerging markets. Emerging Market funds are another variety of global/international funds.
These stocks are identified to be the top performers with respect to the growth potential. The fund manager has to carefully curate the fund by investing a minimum of 80% of the fund in equity or equity related securities. The investment can be in mutual funds or ETFs or other securities that involve equity and debt. This fund provides the investors with an opportunity to access various international markets or can also focus on a single emerging market.
Target investors
Investment in emerging market funds is a high risk high return scenario. It is ideal for investors that have a high risk appetite. A developing country takes a number of years to emerge into a developed country. It is therefore essential for the investor to have a longer investment horizon while investing in emerging market funds. The risks involved and the time frame of investment make it difficult for the risk averse or investors looking for short term investments to invest in emerging market funds.
Types of emerging market funds
There are many types of emerging market funds depending on their composition of assets or the risk involved in each fund. Some types of emerging market funds are mentioned below.
Mutual funds
- Equity
Equity funds are funds that invest in equity or equity related instruments of emerging countries. Such companies can be private limited companies or public limited companies that have high growth potential.
- Debt
Debt funds are funds that invest in debt instruments of public limited or private limited companies of the emerging markets. These instruments can include sovereign bonds, corporate bonds or or debt instruments issued by international agencies, state government or local authorities.
- Hybrid
Hybrid funds like any other mutual funds is the combination of equity or debt instruments of emerging markets.
ETFs
Investment in ETFs of emerging markets is another form of investment that can be accessed by investors. It is a basket of securities that are formed of many stocks or bonds. Like any other ETFs, they can be bought or sold at registered stock exchanges in the country.
Taxation on emerging market funds
Taxation is an important aspect of any type of investment and a major influencing factor in terms of fund selection and volume of investment. Emerging market funds are also subject to capital gains tax like any other funds in India. The taxation of the emerging market funds depends on the type of fund.
As most emerging market funds in India are in the nature of equity funds, their taxation is in line with taxation of equity mutual funds. The short term capital gains (capital gains on funds held for a period less than one year) are taxed at the rate of 15%. The long term capital gains (capital gains on funds held for a period more than one year), on the other hand, are exempt up to Rs.1,00,000 beyond which they are taxed at 10% without any indexation benefits.
Benefits of investing in emerging market funds
Emerging market funds provide many benefits for the investors. Some of such benefits are mentioned below.
- Diversification
The primary benefit of investing in mutual funds is diversification. This diversification can be achieved at international level through emerging market funds.
- Opportunity
Emerging market funds provide the investors to tap the opportunity to gain high returns from the emerging markets. These returns although accompanied with high risks have historically outperformed the developed markets in terms of GDP.
Risks of investing in emerging market funds
There are some inherent risks associated with investment in emerging market funds. Some of such risks are mentioned below.
- Inflation risk
Inflation risk is one of the major risks associated with emerging market funds. Investors have to therefore make informed decisions to ensure their returns are sufficient port adjustment of inflation.
- Liquidity risk
The trading volumes of emerging market securities are not as high as compared to securities in developed countries. This results in the liquidity risk which may lead to difficulty in exiting the market easily.
- Political risk
Developing countries have high political instability. This adds another huge risk factor associated with emerging market funds.
- Currency risk
Currency fluctuations are another bigger risk that is inherent in emerging markets. The volatility against the US Dollar translates into high risk for emerging market funds.
Top emerging market funds
Some of the top emerging funds currently in India and their details are mentioned below.
Kotak Global Emerging Market Regular Plan
This fund was launched in the year 2007 by the fund house of Kotak Mahindra Mutual Funds. Some of the details of the fund are mentioned below.
| Particulars | Details |
| Fund manager | Mr. Arjun Khanna |
| Launch date | 26th September 2007 |
| Minimum investment | Rs. 5,000 |
| Expense ratio | 1.64% |
| Risk | Very High |
The returns provided by the fund as on 7th May 2021 are tabled below
| Period | 6 months | 1 yr | 3 yrs | 5 yrs | Since launch |
| Returns | 13.23% | 54.28% | 10.96% | 13.63% | 6.44% |
PGIM India Emerging Markets Equity Fund
This fund was launched in the year 2007 by the fund house of PGIM India Mutual Funds. Some of the details of the fund are mentioned below.
| Particulars | Details |
| Fund manager | Mr. Anandha Padmanabhan Anjaneyan |
| Launch date | 11th September 2007 |
| Minimum investment | Rs. 5,000 |
| Expense ratio | 2.59% |
| Risk | Very High |
The returns provided by the fund as on 7th May 2021 are tabled below
| Period | 6 months | 1 yr | 3 yrs | 5 yrs | Since launch |
| Returns | 11.75% | 45.04% | 8.18% | 9.51% | 4.38% |
HSBC Global Emerging Markets Fund – Direct Plan
This fund was launched in the year 2013 by the fund house of HSBC Mutual Funds. Some of the details of the fund are mentioned below.
| Particulars | Details |
| Fund manager | Mr. Priyankar Sarkar |
| Launch date | 2nd January 2013 |
| Minimum investment | Rs. 5,000 |
| Expense ratio | 1.70% |
| Risk | Very High |
The returns provided by the fund as on 7th May 2021 are tabled below
| Period | 6 months | 1 yr | 3 yrs | 5 yrs | Since launch |
| Returns | 15.26% | 47.20% | 12.48% | – | – |
Factors to consider before investing in Emerging Market Funds
Before investing in emerging market funds in India, there are several important factors that you should consider to make informed decisions. Below are some of the key aspects to keep in mind:
Risks and Returns Emerging market funds can offer rapid growth potential, but they also come with higher risks. Some of the risks associated with investing in these funds include:
- Inflation risk: Rapid economic growth in emerging economies can lead to inflation.
- Currency risk: The volatility of emerging market currencies against the US dollar can lead to fluctuations in investments made in those currencies.
- Liquidity risk: The trading volumes of emerging economies are typically not as high as their developed counterparts, leading to a risk of liquidity.
- Institutional risk: Regulations are still being formed and implemented in emerging countries, making it challenging for fund managers to make informed decisions.
- Political risk: Political instability in growing countries can put added pressure on the performance of stocks.
While investing in emerging markets can offer tremendous growth opportunities, it’s essential to consider these risks before investing.
Expense ratio is another important factor to be considered while investing in these funds. It refers to the small percentage of the total assets of the fund charged by the fund house towards fund management services. When selecting an emerging market fund to invest in, it’s important to find one with a lower expense ratio to maximize your gains.
By keeping these important factors in mind, you can make informed decisions when investing in emerging market funds in India.
Conclusion
Emerging markets provide a great opportunity for the investors. The investors have to be careful about the risks involved and the return expectations from the emerging markets. As it belongs to a high risk high return scenario, it is advisable to have an equally diversified portfolio and not invest heavily or solely in emerging market funds.
FAQs on Emerging Market Funds
1. Is the expense ratio on emerging market funds low as compared to ETFs?
No. The expense ratio on emerging market funds is quite higher as compared to ETFs.
2. How are emerging market funds taxed?
Emerging funds are subject to capital gains tax and are taxed in line with mutual funds in India. The tax treatment will depend on the period of holding of the units.
3. Will I have to invest in dollars to buy emerging market funds?
No, you can easily invest in any of the emerging market funds by using the Rupee as the investing currency. You can easily invest through the Fisdom app.
4. Should I invest in emerging market mutual funds?
These funds invest in various countries across the world, while there may be exponential growth opportunities, there are risks involved as well. Emerging market mutual or international funds may form a small portion of your portfolio so that it gives diversification benefits.
