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Factors to Reflect Before Investing in Emerging Market Funds

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Before you make the ultimate decision to invest your funds, you must ensure that you find an opportunity that’s certain to grow rapidly. Whether in real estate, equity or gold if you realize that soon the prices will rise, then, you should try to buy and wait for that time. Speaking of equity investment, emerging market funds provide a great opportunity to earn high returns.

However, making these ‘high returns’ isn’t easy. That’s because there are high risks involved in the industry. Moreover, it can take a lot of years before an economy develops. But, if you’re willing to tolerate all the risks and practice the patience of long-term investment (of at least 8 years), then nothing should stop you from making the step. 

The funds are suitable for growth investors who are looking for investment opportunities within the global markets. The following are some important factors to take into consideration before you go ahead with the investment.

Make Informed Decision Before Investing In Emerging Market Funds

Risks vs. Returns 

As mentioned, emerging markets provide swift growth potential. For that, there are many risks that you’re likely to encounter. These include:

  • Political – Developing countries have never-ending political instability. That can increase the pressure on the stock performance. 
  • Inflation – In emerging markets, rapid economic growth is often likely to result in inflation
  • Currency – As you might already be aware, emerging market economies are volatile. That means currency fluctuations within these markets or countries can result in volatility in any investment made in their currencies. 
  • Liquidity – Normally, the emerging markets’ trading volumes are lower than their developed economies counterparts. Therefore, you can always expect a liquidity risk.
  • Institutional – The governments within the emerging countries are still in the process of forming and implementing regulations. That influences the decision-making capabilities of fund managers. 

No doubt that investing your resources in emerging markets can bring forth huge growth opportunities. Nevertheless, it’s important that you consider the risks mentioned here before you make the move. 

Capital gain tax

Since they are an equity find, emerging market mutual funds attract capital gains tax, which depends on the holding period. The holding period is the period for which an investor remains invested within the mutual fund. In most cases, the period comes to an end when you redeem your fund.

According to the holding period, any unit you redeem is subject to short-term capital gains (STCG) or long-term capital gains (LTCG). 

Short-term capital gains (STCG) – If your holding period is at most 1 year, your investment will earn short terms capital gains, which is usually about 15% in most countries.

Long-term capital gains (LTCG) – If your holding period exceeds 1 year, then your investment will garner long-term capital gains. In many countries, the LTCG is taxed at around 10% excluding indexation benefits. 

What’s your Investment Plan?

An emerging market is characterized by ups and downs. However, it’s not difficult to find smaller emerging markets that offer significant growth potential. It would help if you diversified your portfolio and invested a portion in mutual funds. 

While emerging economies will eventually develop, it’s important to ensure that that you invest in the best selection of stocks. Therefore, do proper research of fund manager and fund. 

Expense Ratio

The Expense Ratio is a percentage of the total assets of the fund, the fund house charges towards fund management services. Before you decide to invest in emerging markets, you need to make sure that you get a fund with a lower ratio so that you’ll be able to receive maximum returns. 

Conclusion

The above are some of the important factors you should put into consideration before investing your resources in emerging market funds. When you reflect carefully on the above factors, it will help you to make a more informed decision regarding your investment. 

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