Diversify your portfolio with international mutual funds: A complete guide

Investors today are looking beyond the Indian market to tap into global economic opportunities. International mutual funds can provide a suitable and convenient way for these investors to invest in stocks of companies listed outside of India and gain exposure to global markets.

Let’s understand how investors can access mutual funds investing internationally, how they work, who should invest in international mutual funds and the factors to consider before investing in them.

• Table of contents

1. What are international mutual funds?
2. Types of international mutual funds
3. How do international mutual funds work?
4. Advantages of international mutual funds
5. Factors to consider before investing in international mutual funds
6. Who should invest in international mutual funds?
7. International mutual funds – Additional considerations
8. Taxation on international mutual funds
9. How to invest in international mutual funds?

What are international mutual funds?

International mutual funds are schemes that allocate capital to foreign assets, which could include equities, bonds, commodities etc. They provide investors access to global markets without the complexities of direct international investing. The money is invested in rupees and the units are allocated to the investors.

Types of international mutual funds

Mutual funds investing in international securities usually fall under thematic equity funds or fund of funds. Within these, international mutual funds be of different kinds, based on their investment universe.

• Global funds: These international funds invest in companies across the globe and are benchmarked against global indices such as S&P Global 1200 Index and MSCI All Country World Index.
• Regional funds: These mutual funds focus on specific geographical regions such as Europe, Asia, etc.
• Country-specific funds: These schemes invest in the stock market of a single country, such as USA, Japan, Brazil etc.
• Theme-based: These fund schemes target specific sectors or themes like metals and mining, clean energy globally, autonomous and electric vehicles etc.

How do international mutual funds work?

International funds usually fall under the category of thematic/sectoral equity funds or fund of funds. They collect money from Indian investors and invest it in foreign assets. Fund managers analyse market trends, geopolitical factors, and economic indicators to make investment decisions. Investors buy units of the mutual fund by investing in Indian rupees. The Net Asset Value (NAV) of the fund fluctuates based on the performance of the underlying assets. Returns depend on factors like currency exchange rates, international stock market performance, and economic conditions.

Advantages of international mutual funds

• Diversification: International funds invest in multiple economies which reduces the risk associated with the downturn of a single country’s economy.
• Growth potential: They provide investors with the exposure to developed and emerging markets to generate higher returns in the long-term.
• Access to global leaders: By investing in international mutual funds, investors can participate in the growth of global giants.
• Cushion against rupee depreciation: If the Indian rupee depreciates against the foreign currency, investors can benefit from the exchange rate gain by investing in international mutual funds.

Factors to consider before investing in international mutual funds

• Risk profile: Investors must assess their risk appetite since international funds can be volatile due to global economic and political factors as well as risks specific to the relevant region/economy. Investors must familiarize themselves with the region and its market trends and conditions before investing.
• Currency fluctuations: Returns from investments can be affected by forex rate movements.

Who should invest in international mutual funds?

You may consider investing in international mutual funds if:

• You have a high risk appetite.
• You have a long-term investment horizon.
• You are looking for global diversification.
• Have a broad understanding of global trends and currency fluctuations

International mutual funds – Additional considerations

Here are some additional features and advantages of international mutual funds:

• Can help you expand your portfolio by investing in markets outside of India and gain exposure to global growth opportunities.
• Whether you’re looking to invest in the US or emerging markets, international funds make it easier to tap into the potential of other economies.
• Can enable you to participate in global trends and industries that may not be fully represented in the Indian market, such as autonomous vehicles.
• Suitable way to diversify and mitigate risk when the local market faces volatility and add growth potential to your investments.

Taxation on international mutual funds

Even though international funds predominantly invest in equity and equity-related instruments of international companies, they are still taxed as debt funds. This is because they do not invest in domestic equities. They are taxed as follows:

• Short-term capital gains (STCG): All gains from sale of international mutual fund units are classified as STCG regardless of the holding period. They are taxed at the investor’s applicable slab rate in keeping with the current taxation profile for debt funds.

How to invest in international mutual funds?

To invest in international mutual funds, follow these steps:

1. Identify an Asset Management Company offering an equity fund or Fund of Fund investing in international equities
2. Apply online or offline directly through the AMC or through a registered mutual fund distributor
3. You can also invest through aggregator channels
4. Submit necessary documents and details and complete your KYC validation if not done
5. Select investment mode (SIP or lumpsum) and identify the investment amount.

Conclusion

International mutual funds offer Indian investors a gateway to global markets, enhancing portfolio diversification and return potential. However, understanding the risks and market dynamics is essential before investing. With proper research and a long-term perspective, international funds may be a suitable addition to an investment portfolio.

FAQs:

How long should I stay invested in International Mutual Funds?

International funds, especially those that are equity-oriented, should be held for at least 5-7 years to benefit from potential long-term global market growth.

Where do international mutual funds invest?

International funds invest securities outside India. These could include stocks, bonds etc. They may invest in companies of a specific country/region or invest across the globe. They may also focus on a particular sector or theme.

Are international mutual funds high risk?

International mutual funds, especially those investing in equities, will typically be high risk.

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.