International mutual funds have grown in popularity among investors in recent years. These are generally fund of funds (FoFs) that allow our country’s investors access to overseas markets.
These mutual funds offer an easy way to invest in foreign markets. Individuals without in-depth knowledge of securities can invest in these mutual fund schemes. They have to purchase units of these schemes, and the fund manager will do the rest. Let us look at some of the best international mutual funds for 2022.
What Is an International Mutual Fund?
Also known as overseas or foreign funds, international funds invest in markets outside India. They have a portfolio comprising equities, debt funds, ETFs (Exchange Traded Funds), or foreign mutual funds. These mutual funds may also invest in GDRs (Global Depositary Receipts) and ADRs (American Depository Receipts) of Indian companies.
International funds have become a popular investment option in recent years due to the volatility of the local markets. Many investors have turned to foreign markets to increase the diversification of their portfolios. It is quite effective as the performance of global markets or global mutual funds does not directly correlate with Indian markets.
However, these funds are generally riskier as it is hard to understand other countries’ economies and market movements. Unpredictable foreign exchange rates and macroeconomic factors may impose additional risks on your investments. To find the best international mutual funds for your needs, you must assess your risk appetite and financial goals.
Most International funds in India follow a two-tier master-feeder structure. In this, domestic investors invest in a feeder fund based in the country. The fund manager collects the investment in rupees and invests it in the master fund. This master fund is located in a foreign country and usually has multiple feeder funds under it.
International mutual funds may invest directly in foreign countries’ stocks, bonds, and commodities. Alternatively, they can invest in a pre-designed portfolio of foreign assets.
Types of International Mutual Funds in India
There are several options of international funds that you can choose from. These are as follows:
- Global sectoral funds
The best mutual fund to invest in companies of a specific sector across different countries. A sectoral fund focuses on a single industry such as pharmaceuticals, mining, technology, real estate, healthcare, oil, gas, etc. A mining fund will only focus on mining companies around the world.
- Thematic international mutual funds
Also called global thematic funds, these invest in companies based on an investment theme approach. If the theme is infrastructure, this international mutual fund will invest only in stocks of cement, steel, and power companies. Global innovation funds allow investors to benefit from innovations and disruptive technologies being developed worldwide.
- Country-specific funds
As its name suggests, these mutual funds invest in top companies of a specific country, say the USA or China. These funds limit the securities to a particular country, which helps investors assess their risk and return expectations.
- Regional funds
Like the earlier mutual fund, it invests in the best-performing companies in a specific geographical region like Asia or Europe. Some regional funds allow you to invest in stable and less risky developed markets. Similarly, an emerging markets fund will invest in top companies of developing economies like China, Brazil, Russia, etc.
- Commodity based funds
These invest in grains, crude oil, precious metals, etc. Commodity-based international mutual funds act as a hedge against inflation and increase diversification.
- Global funds
Instead of catering to a specific country/region, these mutual funds invest in companies worldwide. Global funds invest in a portfolio of stocks in different markets.
It allows them to leverage unique opportunities and minimise risks through diversification. Even if one market or sector does not perform well, another will reduce losses.
List of the Best International Mutual Funds in India
Here are the best performing international funds in terms of their 3-year annualized returns as of Aug 02, 2022.
Who Would Want to Invest in International Mutual Funds?
If you are one of the following types of investors, you may want to consider investing in international funds:
- Investors with a diversified portfolio: Those new to mutual funds may not want to invest in international funds. Inexperienced investors will find it difficult to bear the risks of the global equity markets. Those who have invested in Indian stocks can further diversify their portfolio with these funds.
- Knowledgeable investors: These mutual funds suit those with an in-depth understanding of the global markets. You need to understand the risks involved in the global markets, the current economic conditions, and price movements to invest in international mutual funds.
- Investors with a high-risk appetite: Investors not willing to bear risks may not want to invest in international funds. It is relatively tricky for Indian investors to understand the market movements of foreign countries and their effects. That is why these funds are ideal for those with a high-risk appetite.
- Investors have a long-term horizon: These mutual funds suit those trying to accumulate a vast corpus for long-term goals. You need to have an investment horizon of at least five years to get the benefits of international funds.
Here is the list of Top 5 Global Mutual Funds In India
|International Mutual Fund||3-Year Annualised Returns|
|Principal Global Opportunities Fund- Direct Plan||25.22%|
|Motilal Oswal Nasdaq 100 Fund of Fund||18.4%|
|DSP BlackRock US Flexible Equity Fund||14.3%|
|Nippon India US Equity Opportunities Fund||12.71%|
|ICICI Prudential Global Stable Equity Fund||11.90%|
Benefits of Investing in International Mutual Funds
The following are some significant benefits of investing in international mutual funds:
- For investing in global market leaders
These mutual funds allow you to invest in the top global market leaders like Apple, Tesla, Google, Facebook, Netflix, etc. However, these top international brands are not present on the Indian stock exchanges. If you want to take part in the returns of these companies, foreign investment mutual funds offer the easiest way to do so.
- Easier access to international markets
You can access foreign stocks, bonds, currencies, commodities, real estate, and ETFs with international funds. Investing in global markets is difficult as each country has its unique set of rules regarding foreign investments.
With international funds, professional money managers will do all the hard work. They will use their expertise to analyze the global markets and find suitable investments.
- Geographical diversification
International mutual funds ensure geographical diversification. A significant advantage of this is that global markets directly correlate with domestic markets. As a result, you can earn steady returns even when the Indian markets face a downturn.
- Hedge against currency risks
Another great benefit of these mutual funds is that they cushion against currency fluctuations. When you invest only in domestic securities, a decrease in the local currency’s value can decrease your returns considerably. However, when you invest in multiple currencies, it mitigates the losses from such depreciation.
- For leveraging opportunities in different markets
The economies of different countries and geographic regions perform differently at any point. By investing in international mutual funds in India, you can capitalize on other markets when the Indian economy is struggling.
Factors You Should Consider When Investing in International Funds
The following is a list of factors you may want to consider when investing in international mutual funds.
- Political and economic risks: International funds carry several unpredictable risks that investors need to be aware of. Political events, economic turmoil, and other macroeconomic factors may negatively affect your investments. Moreover, countries may change their policies for foreign investors.
- Currency risks: This risk is unique for foreign investments. As your investment in rupees is converted into a foreign currency, depreciation of that currency will deplete your returns upon redemption. Therefore, you must check the prevailing foreign exchange rates when redeeming international mutual funds.
- Choosing the correct country/region: Developed countries offer stable returns and low risks while emerging markets are riskier. That said, the latter offer higher potential returns. It is also good to invest in places with strong corporate governance and legal systems. Make sure to check your risk appetite and return expectations before investing.
- Investment objectives: Ensure that the fund’s investment objective matches your financial needs. You may need to hold these funds for the long term as they carry unpredictable risks. An investment horizon of 5-7 years is recommended for global investment in mutual funds.
- Expense ratio: The expense ratio is a fee that AMCs (Asset Management Companies) charge annually to cover their administrative and operating expenses. This fee is usually higher for international funds than for domestic mutual funds. You will want to check the expense ratio before investing.
International mutual funds allow Indian investors to diversify their portfolios across different countries, sectors, and industries. These are suitable for investors looking to leverage growth opportunities in other economies. They will need to have a high-risk appetite and be willing to invest for the long term to make the best out of these investments.
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Frequently Asked Questions
How are international mutual funds taxed in India?
Though international funds invest primarily in equities, they are taxed as non-equity funds in India. Capital gains from these funds are taxed in the following manner:
- Short Term Capital Gains (STCG) tax applies when you redeem units within three years of investment. These are added to your income and taxed as per your tax bracket.
- Long Term Capital Gains (LTCG) tax applies when the holding period exceeds three years. These are taxed at a 20% rate with indexation benefit.
Are SIPs a good way of investing in foreign mutual funds?
Yes, SIPs (Systematic Investment Plans) are easy and convenient to invest in foreign mutual funds. You can invest a fixed amount of money via SIPs in the international fund at regular intervals. The good thing about SIPs is that you do not need a large sum of money and can only start investing with just Rs 500 per month.
When is the right time to invest in international funds?
As many experts say, the time spent in the market is more important than timing the market. So, instead of finding the right conditions for investing, you may want to check if these funds suit your investment needs.
First, you should decide if you can tolerate the high risks of these investments. Secondly, you will want to ask yourself if you’re staying invested for longer than 5-7 years. Then, you can decide to invest in these funds.
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