Emerging market mutual funds allow investors to gain exposure to developing economies with strong long-term growth potential. This blog explains how these funds work, their benefits and risks, and how they can fit into a globally diversified portfolio.
Global growth is no longer driven by developed economies alone. Some of the most lucrative investment opportunities today are emerging from fast-growing consumer markets and manufacturing hubs across developing countries. These economies are powered by younger populations, rising incomes, and steadily expanding domestic demand, offering long-term growth potential.
And if you are seeking global exposure, emerging market mutual funds provide a simple, diversified, and well-structured route to do so. In this blog, we will discuss what emerging market mutual funds are and how they enable you to diversify your portfolio globally.
What is the Meaning of Emerging Market Mutual Funds?
Emerging market mutual funds invest in equities and other securities across emerging economies worldwide. These are countries that are still developing but show strong potential to evolve into developed markets over time.
The fund managers of these funds aim to invest across different emerging sectors within multiple economies, primarily focusing on areas where rapid economic expansion and rising demand can translate into long-term returns.
Emerging market mutual funds aim to deliver returns that are in line with, or better than the MSCI Emerging Markets Index, which tracks stock markets across 24 developing economies. This index acts as a reference point for how these markets are performing as a whole.
Additionally, you can choose between actively managed funds, where managers actively select investments, and passively managed options that track the benchmark index. These funds are available both as traditional mutual funds and as exchange-traded funds (ETFs), allowing you to pick up a structure that best fits your investment style and long-term goals.
How Do Emerging Market Mutual Funds Work?
An emerging market mutual fund manager starts by scanning opportunities across multiple countries. This involves studying economic trends, demographic shifts, policy direction, and how different sectors are evolving within each market.
While evaluating potential countries, fund managers typically look for a combination of the following characteristics.
- Income levels that are still low but rising steadily, supported by consistent economic growth
- Accelerating industrial activity and infrastructure expansion, indicating long-term capacity building
- Improving education levels and quality of life, which support productivity and consumption
- An expanding middle-income population, driving demand across goods and services
- Progressive policy reforms that encourage foreign investment and market openness
- Meaningful exposure to commodities and agriculture, which often play a larger role in developing economies
Once a country clears these filters, the fund manager determines how big a bet the fund should take on it. This decision flows from the fund’s investment mandate, its comfort with risk, and how strong the country’s growth prospects look.
For example, a fund might allocate around 20% of its portfolio to a market like India. This exposure isn’t concentrated in one or two stocks; instead, it is spread across multiple companies, sectors, and market sizes to ensure the portfolio stays well diversified.
While the investment process remains broadly similar, emerging market mutual funds can differ significantly in how focused or diversified their exposure is; making it important to understand the different fund types available.
Types of Emerging Market Mutual Funds in India
Each type of emerging market mutual fund comes with a distinct level of exposure, risk, and geographic focus to suit varying investment preferences.
- Diversified emerging market equity fund
This is the most common type of emerging market mutual fund. In this fund, the capital gets spread across multiple developing economies and its sectors.
- Regional emerging market fund
Regional emerging market funds focus on a specific region. For example, a fund manager of this fund will target a specific region, such as Asia, Latin America, or Eastern Europe.
- Single-country emerging market fund
This type of fund goes even further and targets a specific country’s economy only. It can provide higher returns but comes with greater country-specific risk.
- Emerging market bond fund
The emerging market bond fund is primarily focused on debt securities issued by governments or companies in emerging markets. It aims to provide safer and recurring income along with global diversification.
Once you know which type of emerging market fund suits your investment approach, it’s equally important to understand how returns from these funds are taxed in India.
Taxation on Emerging Market Mutual Funds
For Indian investors, emerging market mutual funds are typically treated as non-equity funds for tax purposes, as they primarily invest in overseas stocks and do not meet the 65% domestic equity allocation criteria for ‘equity-oriented fund’ status. In practice, many such schemes fall under the “specified mutual fund” bucket; i.e., funds where not more than 35% of total proceeds are invested in equity shares of domestic companies.
The taxation rules were significantly updated by the Finance Act 2023 and further revised by the Finance Act 2024. Based on the holding period (how long you stay invested), capital gains fall into two categories:
Units Acquired on or after April 1, 2023
If your emerging market fund is a “specified mutual fund”, then any gains on redemption/transfer are deemed short-term capital gains (STCG); even if you hold for many years.
- Short-term capital gain is taxed at your applicable income-tax slab rate (added to total income).
- No LTCG concept / no indexation benefit for these units (because section 50AA overrides the usual long-term framework for covered units).
Units Acquired before April 1, 2023
If you invested in an emerging market mutual fund before April 1, 2023, these units are not covered under the “deemed short-term capital gains” rule introduced by Section 50AA.
- If the units were redeemed on or before July 22, 2024, long-term capital gains were taxed at 20% with indexation benefits, provided the required holding period was met.
- If the redemption takes place on or after July 23, 2024, long-term capital gains are taxed at a flat rate of 12.5%, and indexation benefits are no longer available as per updated income tax department guidelines.
In addition, Budget 2024 changes have effectively aligned the long-term holding period for unlisted assets to 24 months. Since mutual fund units are generally treated as unlisted, older international fund investments may now qualify as long-term after two years of holding, depending on how the specific scheme is classified.
Beyond taxation, the real appeal of emerging market mutual funds lies in the unique advantages they can bring to a long-term portfolio.
Benefits of Investing in Emerging Market Mutual Funds
Emerging market mutual funds can play a meaningful role in a portfolio by offering access to economies that are still in their growth phase. Here are other benefits of investing in emerging market mutual funds.
- Access to high-growth economies
These funds invest in countries with expanding consumer bases, rising incomes, and ongoing infrastructure development, allowing investors to participate in long-term economic growth beyond developed markets.
- Geographic and economic diversification
By spreading investments across multiple emerging countries and sectors, these funds reduce reliance on a single market and help diversify portfolios across different growth and policy cycles.
- Professional management and structured exposure
Fund managers actively assess countries, sectors, and companies, giving investors access to emerging markets without the complexity of making direct international investments.
While emerging market mutual funds offer strong growth potential and diversification benefits, that’s not all they bring to the table.
Risks Associated with Emerging Market Mutual Funds
The same factors that drive growth in emerging markets, can also introduce higher volatility and uncertainty for investors.
- Higher market volatility
Since these funds are exposed globally, they can react more sharply to global events like natural disasters, changes in government, policy updates, etc.
- Currency and geopolitical risk
Developing economies are more prone to exchange rate movements and uncertain geopolitical tensions. Both of these factors can have an impact on your overall returns.
- Uneven economic development across countries
Not all emerging economies progress at the same pace, and country-specific challenges can affect the fund’s performance despite broader growth trends.
Considered together, these risks highlight the importance of why investing in emerging market mutual funds require a careful allocation and realistic expectations rather than short-term return chasing.
Who Should Invest in Emerging Market Mutual Funds?
Emerging market mutual funds are a better fit if you’re okay riding through periods of ups and downs and recognize that faster growth usually brings some short-term turbulence with it. You can also consider investing in these funds if you like to keep up with the global headlines frequently.
These funds aren’t meant for quick gains or fast exits. Instead, they tend to reward investors who are willing to stay invested while long-term economic shifts slowly unfold. At their best, emerging market mutual funds may suit you if you are willing to be patient, disciplined, and keep a long-term mindset. Even though there is no minimum holding period necessary, experts and fund houses generally recommend investors to commit for five to seven years, to generate optimized returns.
