What are International Mutual Funds?
International mutual funds are like any other equity fund. You invest in rupees, you are allocated units according to the NAV, and your money is invested in shares.
But, in which your money is invested in shares, it makes these funds different.
In a domestic equity fund, your money is invested in listed companies in India. International funds, on the other hand, are money held in companies that are listed outside India.
Now, international funds can take two different routes to invest in them.
1. They create portfolios by directly purchasing stock.
2. She Invests in Through Companies of an Existing Global Fund
For example- ICICI Prudential US Blue chip Fund builds its own portfolio, while PGIM India Global Equity Opportunities Fund invests PGIM invests in Jenison Global Equity Opportunities Fund.
But, irrespective of the route, these funds are administered and managed by Indian mutual fund companies and all regulations need to be followed.
However, day to day fund management is mostly done by fund schemes through which your money gets invested.
Types of International Mutual Funds
There are 39 international mutual fund schemes available in India and approaches to global investment are different, yet they can be classified into 3 buckets.
Let’s look in detail at each of these categories
- Thematic International Mutual Funds These themes, like domestic thematic funds, follow a themed investment approach.
The difference is that these schemes invest foreign companies related to specific topics. Now these themes can range from mining to natural resources to real estate.
For example – DSP World Mining Fund invests in foreign companies that specialize in mining such as Rio Tinto plc, BHP Group plc, and Barrick Gold Corp.
Similarly, Aditya Birla Sun Life Global Real Estate Fund invests in foreign companies.
2. The next type of international mutual funds are – region or country specific. As the name suggests, these funds invest in the stock markets of a specific region or country.
The objective is to capture the opportunities available in these markets to generate returns.
For example- Motilal Oswal invests in the S&P 500 Index Fund S&P 500 Index, which includes 500 large companies listed on stock exchanges in the United States.
Similarly, the Edelweiss Greater China Equity Off-Shore Fund is an example of a country specific fund.
It invests in companies which are domiciled in it to carry out the major part of their activity in China
3. Third Category – Global Markets Funds of this category have meaning globally, they do not restrict themselves to a specific region or country.
Therefore, you get a portfolio when you invest in them. The world is diverse with stocks.
For example- ICICI Prudential Global Stable Equity Fund (FOF) or Sundaram Global Brand Fund, invest in equities of companies around the world, without limiting yourself to certain geography.
Benefits of International Mutual Funds
- International Mutual Funds. The biggest advantage is the diversification of international funds offering. Different economies and markets do not coexist with each other.
International mutual funds provide an opportunity to invest in an economy that is performing well at a particular point in time.
Good returns from the overseas market will support overall returns from your portfolio at a time when the primary market, in this case the Indian market is not doing well.
But how big a benefit is it?
To get this answer, we looked at six diverse indices from 2015 to now, the US, Japan, Hong Kong, Britain, India and Korea; It emerges that none of the market indices have managed to maintain the top position for two consecutive years.
This demonstration describes how different regional markets perform, depending on local as well as global events and events.
For example- the current Kovid-19 pandemic has impacted all global markets so far this year; However, different levels of decline and recovery were observed in each country.
Basically, spreading your investment is geographic globally, and is beneficial for your portfolio in the way it is diversifying across sectors and market caps when investing in India.
2. The other advantage is that you become the owner of some of the largest businesses in the world.
As I talked in the beginning, in our daily we use products from so many global brands. These companies have a global presence and spread and their growth is not limited to any country.
When you invest in them, you get a share of the profits that these companies make.
3. Currency diversification When you invest in international markets, you are hedging or even saving the returns of your portfolio from falling Indian rupee.
If you look at the long-term trend, the rupee is depreciating against the dollar. 2000 from about 45 rupees to a dollar a year, now we are at around Rs 5 per dollar.
It can be beneficial for you with international funds. You take foreign exchange risk by investing in rupees.
Let us try and explain it with an example.
Suppose you paid Rs. 1,000 in US dollars. At the rate of $ 1 = 75 rupees you will get $ 13.34.
Now the value of this investment of $ 13.34 increases to say $ 15. Also, the value of the rupee for a dollar is Rs. Becomes 76.5.
In this scenario the value of your investment is Rs. 1147.5 (USD 15 * 76.5). If the value of the dollar remains at Rs 75, then the value of your investment is Rs. 1125
In this example, even your investment did not increase and the stalling value of $ 13.34 and the currency stood at Rs 76.5. Till then.
This investment will be Rs 1,020. You will have a 2% increase without any change in the invested value.
As you can see there are a lot of benefits of investing in international funds.
But like any other investment, there are some risks. And you should know about them before investing.
Risk of International Mutual Funds
- Economic and Political Risk
Like India, the economic and political situation can have a negative impact on your investment in these countries or regions.
In addition, as you may not be able to access information easily in these countries, this risk is increased in these situations.
We saw above how beneficial a strong dollar is for you. However, the fund you invest in can convert rupees into different currencies depending on the type of fund you invest.
Now if any of these currencies falls against the rupee instead of rising, you may see an impact on the returns.
However, this effect of exchange rate will not be directly obvious to you, because you are investing in rupees, and you see the performance of the fund in the same currency.
But this fluctuation works in the background and affects your returns. The risks are covered.
Taxation on Returns
Even if you are investing in equity through international mutual funds, for the purpose of taxation, they are considered as debt funds.
Therefore, if you make a profit within 3 years of investing, it is classified as short-term capital gain (STCG).
These benefits are added to your income and taxed according to the tax slab.
And if you remain invested for more than 3 years, the returns are classified as long-term capital gains and are charged at 20% after adjusting for inflation with inflation gains.
Since you are investing in equity, stay invested for at least 5 years. If you do this, you get a tax benefit. Meeting the objectives of the investment is very high.