With globalization, mutual funds had started investing in securities located throughout the world. These funds are commonly known as world equity funds. The efficiency and return of the funds depend on the domestic market conditions and also on how the monetary environments in those markets work.
The monetary policies in each country have direct impact on the efficiency of the world equity funds. The difference in monetary environments affects the way various portfolio managers of these world equity funds behave. For instance, if the interest rates move upwards, the hold of these managers on the equity funds tend to increase the extent of instability. Researches have indicated that during increase in rates of interest, portfolio managers show heterogeneous behavior and hence increased volatility. Understanding the trend of interest rates generally depends on monetary policy that tries to influence the markets and hence the world equity funds, much before the official interferences.
These monetary policies directly impact the equilibrium between industry environment and portfolio managers thereby affecting the efficiency of the market. A market is said to be inefficient if all the portfolio managers are able to surpass the benchmark.
The differences in monetary policies in different market regimes are diverse and this diversification is usually the reason for benefits that comes from investing in world equity funds. These diversification benefits are greater when investment in emerging markets is made during restrictive monetary environments.
It has been observed that during restrictive period, the world equity funds tend to distribute broadly around the indices, while during expansive phase these funds are closer to interpolating function and face greater difficulties in their bid to beat their target. While some markets may be in restrictive phase while others in the expansive one and since situations are usually different for different markets these world equity funds have the flexibility to diversify.
Better understanding of the monetary policies actually help the portfolio managers to undertake positive positions not just in evaluating the timing to pick up any stock but also the sensitivity of the benchmark in that particular policy regime.
It is therefore important that the portfolio managers of world equity funds keep a constant watch on the monetary policies to figure out the right time to enter any market or the time to move out of the market and follow the market trend to harness maximum benefit for their customers.
Investment in such funds is often termed safe as these funds move across different markets and are generally less prone to market uncertainties as they have the option of diversification and move out from one market to another.