International Funds are your best bet if you want geographical diversification of your portfolio. Read on to find out how you can get the most of these foreign funds.
If you’re new to investing, then Mutual Funds may not be your first choice. Given that a lot of people lack knowledge about this financial product, it may not seem desirable at first and the chances of getting confused with it are higher.
Additional Reading: Understanding Mutual Funds
But here’s the thing. There are several types of Mutual Funds that suit different investors. And, with a Systematic Investment Plan (SIP) you are guaranteed not only to beat market volatility, but also get some tax benefits. That said, there is a Mutual Fund for every individual looking to invest. It’s just about identifying what suits you and getting down to it.
Additional Reading: Mutual Funds – SIP It Down & Feel Good
Today, we’ll tell you all about International Mutual Funds which is a type of Mutual Fund wherein you can invest in companies located anywhere outside of your country of residence. They’re sometimes also known as ‘foreign funds’, or simply ‘international funds’.
This type of Mutual Fund is best suited for investors who are looking for geographical diversification in their portfolio. They typically invest in equities of a region or country, or fixed income securities.
International Fund Vs Global Fund
A lot of people tend to confuse an International Fund with a Global Fund. The difference is that a Global Fund includes the entire world, while an international fund includes the entire world excluding the investor’s home country.
Global Funds consist of securities in all parts of the world, including the country in which you reside. They are chosen primarily by investors who wish to diversify against country-specific risk without excluding their own country. Such investors may already have a lower than desired concentration of domestic investments or may not want to take on the high level of sovereign risk involved in making foreign investments.
Additional Reading: Choose Global Funds Only If Your Core Portfolio Is In Place!
However, International Funds consists of securities from all countries except the investors home country. These funds provide diversification outside of the investor’s domestic investments. For example, if an investor currently holds a portfolio consisting mainly of domestic investments, he or she may choose to diversify against country-specific risk and purchase an international fund.
The Different Kinds
Although there might be more variety in terms of types of International Funds outside our country, in India, the available International Funds are country/region-specific and thematic funds. For instance, if a fund invests in countries like US, Europe, Asia, they are termed as country/region-specific. Subsequently, funds that invest in sectors like consumption, energy, and real estate are termed as thematic funds.
Additional Reading: International Mutual Funds Can Benefit You
How To Invest
As a resident Indian investor, you have to invest only in Indian rupees, and like any other Mutual Fund, once you’ve selected the fund, you can write a cheque and submit the application to the fund house/fund manager. You can even do it online these days.
The Advantages
You wouldn’t invest in something unless you have a certain amount of benefit, right? When the Indian economy isn’t doing very well, you could lean on the global markets. Likewise, with International Funds, you can be part of bigger successful non-Indian firms through your investment in them.
There are many stocks and businesses which aren’t available in the listed space in India. A good example to such kind of businesses are the cola companies. International Funds let you invest in such spaces and make you part of the company’s growth and success stories.
Additional Reading: Are International Funds Worth It?
The Risks
Apart from the normal risks that entail investing in stocks, International Funds pose the risk of currency exchange rates too. Often there is a fluctuation in the value of other markets currency against the Indian rupee. So, when you invest in rupees, the fund house will have to bear exposure to international stocks in various currencies. And that’s why investors pose a high risk of currency fluctuation that can affect the Net Asset Value (NAV) of the fund.
For example, if you were investing in an American Fund (in dollars) and if the rupee depreciates against the dollar, you will get more rupees for every dollar invested, and your NAV will go higher. Whereas, if the rupee were to appreciate against the dollar, you’ll get fewer rupees for every dollar invested.
The Taxation
Most Indians look to invest in products that give them tax benefits. And when it comes to the tax treatment of International Funds, they aren’t any different from the Debt Mutual Funds. From a taxation point of view, they’re on par with Debt Mutual Funds.
Additional Reading: Introduction To Debt Funds
If your holding period of the fund is less than three years, then, as an investor you are required to pay short-term capital gains tax on the profits as your tax slab. And, when the fund is held for more than three years, then, the investor gets indexation benefit as the profit is treated as long-term capital gains. Post indexation, the gain is taxed at 20 percent.
Well, if International Funds aren’t your cup of tea, then you don’t have to worry. Because we have other stable investment options for you.