International mutual funds, also known as overseas funds, are funds that invest primarily in the stocks of companies listed outside of India. By taking a greater risk of investing in international markets, these funds help in diversifying the investment portfolio and in generating higher returns. They allow you to invest in some of the world’s biggest companies.
Investors are now more aware of the various global investment options, which helps them in diversifying their investment portfolios. The investment portfolio is diversified across sectors, industries, etc. However, these funds carry a higher risk because it is hard to predict the market fluctuations of a particular country and their effects vis-a-vis economic and global changes.
How Do International Mutual Funds Work?
Investing in international funds is the same as investing in any other mutual fund. The money is invested in rupees, and in return, investors receive the units. The fund manager invests the money in the shares of foreign-listed companies. The fund manager invests your money in international stocks in two ways.
- By directly investing in stocks and building a portfolio.
- Or, by investing in a global fund that already has a pre-designed portfolio consisting of stocks of international companies.
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.
What Are The Different Types Of International Funds?
Investors in India have access to a wide variety of international funds. They all approach international investing in different ways. Some of the categories are:
- Thematic International Funds: These funds are similar to domestic thematic mutual funds wherein the fund follows a theme-based investment approach. For instance, a domestic thematic fund with the theme of infrastructure will invest in the stocks of steel, power, and cement firms. Similar to this, a thematic international fund will buy shares in international companies that are related to the theme.
- Region/Country Specific Funds: As the name indicates, these funds make investments in the stock markets of particular regions or countries. A regional fund is a fund that makes investments in a certain geographical region, such as Europe, Asia, etc. Investors put money into these funds to diversify their portfolios for those regions they have thorough knowledge about. A country fund makes investments in a specific country. For instance, a country fund for the United States of America would invest in equities and securities that are present there. As a result, it is easier to research and analyze a specific market, and it also allows investors to focus on their risk and return expectations.
- Global Funds: These funds invest globally rather than focusing on a particular nation or region. Their portfolio consists of stocks from international companies. By doing so, they simultaneously take advantage of possibilities in several markets. The main objective here is diversification. Even if one market performs poorly, investments in other markets can save the day.
Taxation of International Mutual Funds
Despite the fact that foreign mutual funds contain equity investments as their underlying asset, they are taxed in a different manner. It makes sense to presume they will be subject to the same taxation as all other equity mutual funds in India. But this is not the case. International fund returns are taxed in the same manner as returns from debt funds. When you make a profit from the sale of an investment, you make a capital gain. Under the debt taxation structure, the capital gains earned from the sale of an investment are taxed on the basis of how long you held your investment. The same goes for international funds:
- Short Term Capital Gains (STCG): STCG are gains made on investments in international funds that are redeemed within three years. These gains or earnings are added to your income and taxed in accordance with the tax bracket in which you are situated.
- Long-Term Capital Gain (LTCG): If you invest for three years or more, your returns are classified as Long-Term Capital Gain (LTCG). Such gains are taxed at the rate of 20% after indexation
What Are The Advantages Of Investing In International Mutual Funds?
- Geographical Diversification: There are various benefits to investing in international funds. However, diversification is one of the greatest advantages of international funds. Different economies perform differently. There may be instances when the Indian economy is in trouble while the US, UK, Chinese, or Japanese economies are experiencing unprecedented growth. So, while the Indian economy is unable to generate good returns for you, international funds can help you utilize the opportunities in these markets. As a result, you can achieve global diversification if you distribute your investments across countries.
- International Exposure: By making investments in international funds, you can become a shareholder in some of the biggest companies in the world, including Apple, Adidas, and Facebook.
- Portfolio Diversification: A portfolio includes high, medium, and low-risk investments. If the home country is experiencing a low market, one can compensate for it through the international market.
- Professional Management: Many investors are not familiar enough with the economy and industry of a foreign country. Here, an experienced intermediary can be of great assistance. As a result, even if the investors are unfamiliar with the global market, they can still receive exposure to it. Investors typically lack the necessary resources and knowledge to manage a diversified investment portfolio. However, portfolio managers oversee the management of mutual funds. They will monitor the fund’s holdings and determine the sale or purchase of equities.
- Currency Diversification: Most currencies have depreciated against the dollar due to aggressive rate hikes and quantitative tightening by the US Federal Reserve. If we look at the rupee’s value in relation to the dollar over the past few years, we can observe a downward trend. There are various causes for this depreciation, including fiscal policies, rising inflation rates, and the political environment. Investors can turn this depreciation into an advantage by investing in international funds. Your returns will be increased if there is any appreciation in the value of the foreign currency or any depreciation in the domestic currency.
Who Should Invest In International Funds?
International funds are mutual fund schemes that invest primarily in the stocks of companies outside of India. These funds enable investors to profit from global growth and increase portfolio returns by investing in foreign markets. It is a great way to diversify the portfolio. An investor must establish their investment objective before investing in international funds.
Investment in international mutual funds is suitable for investors:
- Looking to Invest in Global Market Leaders: International mutual funds invest in the stocks of many market leaders. The only drawback is that Indian stock markets do not list many of these market leaders. For instance, international funds which track the NASDAQ 100 will be investing in Apple, etc. Therefore, if you wish to own your favorite brands, you can do so by investing in international funds.
- Searching for Opportunities in Different Markets: Different markets perform differently at a given period of time. At any given time, different markets exhibit varying levels of performance. There have been times when the US markets performed incredibly well while the Indian markets were underperforming. Investors can therefore profit from other markets by making investments in international funds whether domestic markets are performing well or not.
- Investors with a Long-Term Horizon: International funds can help investors that are trying to deploy a sizable corpus to meet their long-term objectives, such as retirement or children’s education. Investors are protected against the volatility of equity markets by having a long-term investing horizon. It also helps the investor reap the benefits of compounding. One needs to have a long-term investment horizon in order to benefit from the advantages provided by international funds.
Factors To Consider Before Investing In Foreign Funds
Even though international funds offer a wide range of advantages, you should also be aware of some of the risks related to them. Below are a few factors you can consider before investing in the Foreign Fund:
- Political and Economic Risk: Economic and political factors both have a significant impact on a country’s stock market. Therefore, any political turbulence or economic unrest could harm your investments. Changes in the political or economic conditions could have a detrimental effect on your investment in foreign funds because they invest in other nations.
- Currency Risk: Depending on the type of international fund, your rupee investment is converted into currency based on the fund’s investment approach. So, if your fund invests in the US markets, your investment in rupees will be converted to US dollars (USD). You will benefit if the US dollar appreciates with respect to the Indian rupee. It will, however, have a negative effect on your portfolio if it depreciates in value against the rupee.
- Expense Ratio: Know the costs that eat into your earnings before investing in international funds. An expense ratio is a cost that the asset management companies charge you. Basically, this fee is used to pay for the fund’s overhead expenses, including the fund manager’s salary. The fee is charged annually.
- Research: Always do research on the mutual fund strategy with regard to its credit risk, default risk, past performance, risk category, and fund distribution, which are spread across various sectors. Read the offer documents carefully. Different international funds have different investment strategies that their fund managers use to build their portfolios. There are funds with portfolios that include both Indian and overseas equities. On the other hand, some funds are only focused on investing in stocks from emerging markets. So, there are numerous international funds with diverse portfolios. Therefore, it is important to be aware of where the fund invests, and it should align with the investment objective.
- Selection: Select a country based on a few criterion, such as a stable and developed stock market, an effective legal system, and strong corporate governance. Choose a country or stock market that is less risky and offers a better return and profit.
Frequently Asked Questions (FAQs)
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How to invest with Kuvera?
Kuvera is the one-stop solution for all your investments and financial goals. You can diversify your portfolio with Kuvera.
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- Download the Kuvera app or visit the official website.
- Create your account on Kuvera by completing the mandatory KYC procedure. Once it is completed, select the ‘Invest’ option on the homepage, after which you can select ‘Invest in Global Markets’.
- You can now explore the list and select the plan accordingly. Both lumpsum and monthly SIP options are available. With the SIP option, you can start investing with typically Rs. 500 per month.
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Are international funds a good investment option?
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- Geographic diversification of the investor’s portfolio is the main advantage of investing in foreign mutual funds. Sometimes, international market investment helps in overcoming the current local market crisis. There is a higher probability of long-term growth in global markets. Additionally, it offers the investor the chance to diversify their investments across various markets, industries, risk classes, etc.
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- Exposure to global stock markets is another benefit of investing in international funds. However, it is vital to understand the market movements and the economic changes in these nations. Investors that have a high-risk tolerance can choose these funds. The exposure of these funds can also be used to align with one’s financial goals, such as a child’s higher education, marriage, etc.
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- There is a portfolio manager for each mutual fund. With the aid of detailed data, technical expertise, and international market investment experience, a portfolio manager of a fund house can invest the investor’s money in the right places. As a result, any new investor will find it easier to take advantage of opportunities in foreign markets through an international mutual fund.
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How much should I invest in international funds?
Investors can allocate a certain amount of their portfolio to international mutual funds. However, before making an investment, investors must take into account a number of factors. They must first be aware of their level of risk tolerance. Next, they must know the investment goals for which they want to invest. Based on these factors, investors can decide how much money to invest in international mutual funds, which can help them diversify their portfolios. This fund can act as an alternative in the investor’s portfolio. This is especially for those investors who are seeking a long-term investment option. In addition, this fund can generate a higher SIP or lump sum return for investors with higher risk tolerance. It also allows investors to earn a profit from the market cycle of other country’s economies.
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How are international funds taxed?
From a taxation perspective, international funds are treated the same as debt mutual funds. Investors must pay short-term capital gains tax as per the applicable slab rate if they sell their units before a period of three years. When a fund is held for more than three years, the investors will get the benefit of indexation and the gains will be subject to a 20 % tax rate. The gains will be long-term capital gains.
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Do I need international funds in my portfolio?
It contributes to the overall portfolio’s diversification. It offers the chance to increase the scope of investments. Rather than investing all of one’s funds in a single sector, one can get benefit from other international markets. It will also reduce the risk of the overall investment portfolio.
Related to International Mutual Funds: Best International Mutual Funds in India
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