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Emerging Market Funds

  • Marisha Bhatt
  • Jan 12 2022
  • 7 minutes
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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

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.

ParticularsDetails
Fund managerMr. Arjun Khanna
Launch date26th September 2007
Minimum investmentRs. 5,000
Expense ratio1.64%
RiskVery High

The returns provided by the fund as on 7th May 2021 are tabled below

Period6 months1 yr3 yrs5 yrsSince launch
Returns13.23%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.

ParticularsDetails
Fund managerMr. Anandha Padmanabhan Anjaneyan
Launch date11th September 2007
Minimum investmentRs. 5,000
Expense ratio2.59%
RiskVery High

The returns provided by the fund as on 7th May 2021 are tabled below

Period6 months1 yr3 yrs5 yrsSince launch
Returns11.75%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.

ParticularsDetails
Fund managerMr. Priyankar Sarkar
Launch date2nd January 2013
Minimum investmentRs. 5,000
Expense ratio1.70%
RiskVery High

The returns provided by the fund as on 7th May 2021 are tabled below

Period6 months1 yr3 yrs5 yrsSince launch
Returns15.26%47.20%12.48%

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 Finity 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.

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