Emerging Market Funds - Definition, Expense Ratio, Risk & Returns

Introduction

Emerging market funds invest in countries that are growing fast and building their economies. These nations often have young populations, better infrastructure coming up, rising technology use, and many new businesses. Because of this growth, company profits can rise quickly. At the same time, political, currency, or regulatory changes can make prices move up and down more than in developed markets.

These funds are available as mutual funds or exchange-traded funds (ETFs). They can hold stocks from multiple countries or focus on one region. The goal is simple: let your money ride on the growth of several new markets, instead of just one country. In this guide, we explain the meaning, working, types, expense ratio, risks, expected returns, and how to choose the right emerging market fund.

Open Demat account and Unlock smarter investing today!

What are Emerging Market Funds?

An emerging market fund is a basket of companies from developing countries across Asia, Africa, Latin America, Eastern Europe, and the Middle East. These funds typically hold:

• Banks
• Tech firms
• Consumer brands
• Energy companies

This gives investors broad exposure, reducing the risk of betting on a single stock or country.

Index vs. Active Funds

• Index Funds / ETFs: Track a popular emerging market index. Low cost, simple, and rules-based.
• Active Funds: A fund manager picks and manages stocks. Flexible but usually higher in cost.

How Do Emerging Market Funds Work?

When you invest, your money is pooled with other investors. The fund then buys stocks across countries.

• Index Funds follow a fixed list of companies in the index.
• Active Funds allow the manager to adjust holdings.
• NAV (Net Asset Value) moves up or down depending on stock performance.
• Currency Impact: Exchange rate changes can increase or reduce your returns.
• Investment Modes: Lump sum or SIP (Systematic Investment Plan). SIP helps smooth out ups and downs.

Types of Emerging Market Funds

1. Broad Emerging Market Index Funds

• Track large baskets across many countries
• Low-cost and diversified

2. Active Emerging Market Funds

• Manager-driven stock selection
• Higher flexibility but higher cost

3. Regional Funds

• Focus on specific regions (e.g., Asia, Latin America, EMEA)
• Higher concentration risk compared to broad funds

4. Single-Country Funds

• Invest in one country only
• Potentially high returns, but also higher risk

5. Factor or Style Funds

• Choose stocks based on traits like value, quality, or momentum
• Can behave differently from broad funds

6. Small-cap or Mid-cap EM Funds

• Invest in smaller companies with high growth potential
• More volatile and less liquid

Expense Ratio: What It Is and Why It Matters

The expense ratio is the yearly fee charged by the fund for managing your investment. It covers research, trading, custody, and operations.

• Shown as a percentage (e.g., 0.30% or 1.50%).
• Already deducted from NAV.
• Index Funds/ETFs usually have lower expense ratios.
• Active Funds cost more due to active management.

Impact Example:

• Fund A (Index): Expense ratio 0.30% → Net return 9.7% per year → Value after 10 years = ₹2,52,000
• Fund B (Active): Expense ratio 1.50% → Net return 8.5% per year → Value after 10 years = ₹2,26,000
• Difference: ₹26,000 over 10 years, even with same gross returns.

Risks of Emerging Market Funds

1. Market Risk

Stock prices swing more than in developed markets.

2. Currency Risk

Exchange rate changes can raise or lower your return.

3. Political & Policy Risk

Regulatory or leadership changes may impact companies.

4. Liquidity Risk

Small markets may have fewer buyers/sellers.

5. Sector & Country Concentration

Too much exposure to one area increases risk.

6. Manager Risk (Active Funds)

Fund manager decisions may underperform.

7. Tracking Error (Index Funds)

Fund returns may slightly differ from the benchmark.

Returns: What to Expect

Emerging markets can give higher long-term growth than developed markets. However, returns are uneven:

• Can rise sharply during growth phases
• May remain flat or negative during global slowdowns

Sources of return:

1. Company earnings growth
2. Market valuation changes
3. Currency movements

Tip: Use SIPs and stay invested for at least 5–7 years to manage volatility.

How to Choose and Start Investing

1. Set Goals & Timeframe: At least 7 years if you can handle ups and downs.
2. Pick Broad Exposure First: Low-cost index funds or consistent active funds.
3. Check Key Details: Expense ratio, sector & country mix, past performance.
4. Start Small with SIP: Avoid lump sum unless you accept timing risk.
5. Review Annually: Switch funds only if underperforming peers consistently.
6. Allocation Advice: Many investors keep 10–20% of equity in global/emerging funds.

Comparison Table: Index vs. Active Funds

Feature

Index Funds/ETFs

Active Funds

Cost

Low (0.10% – 0.50%)

Higher (1% – 2%)

Management Style

Passive (tracks index)

Active (manager selects stocks)

Transparency

Very high (clear holdings)

Varies (depends on manager)

Risk

Market risk + tracking error

Market risk + manager decisions

Goal

Match the index performance

Beat the index performance

Best For

Beginners, low-cost investing

Experienced investors seeking alpha

Example Calculation

Investment: ₹1,00,000 in two funds for 10 years

• Fund A (Index): 9.7% return → ₹2,52,000
• Fund B (Active): 8.5% return → ₹2,26,000
• Gap: ₹26,000

Shows why expense ratio matters in long-term wealth creation.

Conclusion

Emerging market funds can add global growth to your portfolio, but they come with higher risks. For most beginners, broad index or well-managed active funds are a good starting point. Keep costs in check, stay invested long term, and review regularly to make the most of these opportunities.