Emerging Market Mutual Funds: Meaning, Benefits & Risks

Investing in mutual funds does not always mean investing in domestic markets. There are various businesses across developing countries to which one gets exposure through emerging market mutual funds. Through this fund, one can participate in its economic growth.

In today’s blog post, we will give you an overview of an emerging market mutual fund along with the benefits and risks of investing in it. 

Introduction: Emerging Market Mutual Fund?

An emerging market mutual fund is an investment strategy that generally invests in companies that have strong growth potential and have the potential to become future leaders. They generally consider investing in companies that belong to emerging countries, and instead of investing in a single country, they invest across several countries. They often take exposure in countries like India, China, Brazil, etc.

Key Features of Emerging Market Mutual Fund

The key features of an emerging market mutual fund are as follows:

• International Exposure: The key features of an emerging market mutual fund is that it takes exposure outside the Indian market and provides access to companies operating in different countries.
• Diversification: By investing in an international market mutual fund, one can diversify their investment portfolio by taking some exposure in different countries.
• Professional Fund Management: Investors generally do not have time to analyse companies and the growth potential of other countries. On behalf of the investor, the fund manager does the job.
• Sectoral Allocation: An emerging market fund generally invests the investor’s money across different sectors such as technology, financial services, healthcare, defence, etc. This helps an investor in taking benefit from sectoral diversification. 

How Does an Emerging Market Mutual Fund Work

The working process of an emerging market mutual fund is as follows:

• Pooling Money: The first step is the purchase made by the investors. They purchase units of emerging market mutual funds through a lump sum or SIP. The money from different investors is pooled together into one fund.
• Selection of Stock by Fund Manager: In the next step, the fund manager and their research team identify the emerging economy in which they wish to invest, and then they choose the stocks that have strong growth potential.
• Investment of Money: Once the securities are selected, the fund manager invests the accumulated amount in the selected securities.
• Monitoring: The key responsibility of the fund manager is to monitor the securities in which they have invested their fund in order to book profits promptly. Tracking progress is necessary so that the investment objective can be achieved.

Types of Emerging Market Mutual Fund

The different types of emerging market mutual funds are as follows:

• Emerging Market Equity Fund: These funds primarily invest investors’ money in shares or companies located in different emerging economies. Their portfolio may be spread across different countries such as China, Brazil, etc.
• Emerging Market Debt Fund: Such types of funds invest primarily in debt securities such as government bonds, corporate bonds, etc., of different countries. The returns of this fund depend on the interest income that comes from the underlying bonds in the portfolio.
• Regional Emerging Market Fund: This fund has a concentrated portfolio across different geographical regions. These funds have a more targeted approach and generally have a concentrated portfolio.

Read Also: Floater Debt Funds: Benefits, Risks & Taxation in India

Benefits of Investing in an Emerging Market Mutual Fund

The key benefits of investing in an emerging market mutual fund are as follows:

• Emerging Economy: The key benefit of investing in an emerging market fund is that it allows an investor the opportunity to take exposure to developing economies such as Brazil, Mexico, etc.
• Portfolio Diversification: If an investor has a concentrated portfolio in the Indian equity market, then an emerging market fund can provide exposure to companies operating in other economies having high growth potential.
• Convenience: Investing directly in the stocks of other countries requires multiple accounts, currencies, etc. An international mutual fund can provide a simpler way to get exposure to a basket of emerging markets.
• Professional Management: Direct investing in international economies can be challenging because each country has different regulations and economic conditions. Emerging market mutual funds are managed by professional fund managers who make decisions on behalf of investors.

Risk of an Emerging Market Mutual Fund

The key risks of investing in an emerging market mutual fund are as follows:

• Volatility: Emerging market mutual funds can experience sharp price movements, especially during negative global events, interest rate changes, or geopolitical events.
• Currency Risk: This is a key risk when investing in an emerging market mutual fund. A fund generally invests money in shares of international companies in US dollars, and any fluctuation in currency can lead to a fall in the value of the investment.
• Geopolitical Risk: Factors like trade disputes, wars, sanctions, and other geopolitical events can impact the performance and growth prospects of emerging economies.
• Interest Rate Risk: Rising interest rates in the economy of emerging countries can significantly increase the borrowing cost for companies and reduce economic activities. 

How to Invest in an Emerging Market Mutual Fund

To invest in an emerging market mutual fund, one can follow the steps mentioned below:

• Open Account: The first step towards investing in an emerging market mutual fund is to open an account with Pocketful.
• Completing KYC: To open an account, one is required to complete KYC, which generally takes 5-10 minutes. For this, one is required to have basic documents such as PAN, Aadhaar, etc.
• Look for Mutual Fund: After logging in to the mobile application, you need to visit the mutual fund section of the mobile application.
• Choose Fund: In the mutual fund section, you can look for the emerging market mutual fund of your choice. The fund can be chosen based on the risk profile and fund performance.
• Choose Investment Option: Once the fund is chosen, you can select the investment option such as SIP or lump sum.
• Periodic Review: An investor should periodically review their portfolio to enhance its return by removing underperforming funds from the portfolio.

Who Should Invest in an Emerging Market Mutual Fund

Investment in emerging market mutual funds is suitable for investors who are mentioned below:

• International Diversification: Investors who are looking to diversify their investment portfolio across different economies can consider investing in emerging market funds.
• Aggressive Risk Profile: Emerging market funds can be highly volatile because of factors such as economic and political events, etc.
• Long-Term Investors: Investors who have a longer investment horizon can consider investing in emerging market funds, as these funds can be volatile in the short run.

Read Also: What Is IDCW in Mutual Funds and How Does It Work?

Conclusion

On a concluding note, emerging market mutual funds are an investment tool that allows investors to gain exposure to international markets that have strong growth potential in the long run. It allows investors to bring geographical diversification to a portfolio. Direct access to international stocks requires a different account and expertise. However, investing in an emerging market mutual fund does not guarantee returns; it has its own set of risks, such as market volatility, currency fluctuations, etc. Therefore, before investing in such funds, one must understand their risk profile and investment objective and consult their investment advisor.

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