Is It The Right Time To Invest In International Funds?

Many international equity-oriented mutual fund schemes in India have witnessed a sharp fall in their value in the last couple of months. DSIJ elucidates if it is right time to invest in these funds. 



International funds, and especially the US dedicated funds, were the talk of the town in the mutual fund industry in the year 2018. They were in the limelight in the initial nine months for their phenomenal outperformance and the last few months for their sharp fall. The month of December was especially bad for the US equities that saw one of the worst monthly falls in December since the Great Depression of the 1930s. The broader equity market index of the US also fell by more than 10% in the month of December 2018 alone. Similarly, Nasdaq saw a fall of 11.51% during the same duration. This has clearly impacted the performance of international mutual funds dedicated to these geographies. Other geographies also did not remain immune to this fall and they too fell in tandem.

The average monthly return of funds shows how they had created wealth for their investors in the first nine month of the year 2018. However, the last quarter saw a drastic fall. 



Our analysis shows that out of total international funds present in India, a majority of the investment is in the US dedicated market, which forms around 54% of the total assets at the end of November 2018. Rest of them are spread into commodities, including gold and real estate, emerging market, Asian market, global funds, and few other countries.

Share of Geographies in total international and global funds



There are also more number of funds available that are investing in the US equities and hence our analysis will focus more on the US dedicated funds.

Should you invest in the international funds now?

Given this sharp fall, does it make sense to invest in international funds now? Our analysis shows that after the fall, most of the funds are available at a price prevailing at the March 2018 level for the US dedicated funds, while for global and emerging market funds, the NAVs are of September and October 2017.

This clearly shows that these funds are available at very attractive prices. Moreover, our research shows that, after the fall, the US market has recovered smartly in the following months, the signs of which were clearly visible in the gains of the first week of 2019. The broader equity market indices gained by little more than 3 per cent.

One of the reasons why the US market fell in the last few months was because, after almost a decade of growth, many economists believe that the US is probably nearing the end of this economic cycle. Such concerns were fuelled by the expected fall in the economic activity globally due to the trade conflict between the US and China. Even the US Federal Reserve became more hawkish and the market expected interest rates hikes. All this led to increase in volatility in the US markets. Nonetheless, according to Bloomberg, the average of the predictions given by 22 analysts who offered a target for the S&P was 2,975 by end of 2019. This is almost 17% higher than the year-end closing for the year 2018. The reason for such optimism lies in the strong US economic data, including corporate earnings that have been strong, and the companies having a healthy outlook for the coming years. The US economy expanded at 3.4 per cent in the third quarter and there is still steam left in the US economy before it begins to falter.

Besides the expected higher returns, an investment in international fund also helps you in portfolio diversification. We know how investments in different asset classes such as equity, debt and gold helps you to alleviate the risk of dependence on a single asset class. Historically, it has been observed that just like different asset classes perform differently in different periods, international markets too perform differently in different periods.



The above table clearly shows the divergence in the performance of the markets internationally. In the year 2018, Indian market represented by Nifty 50 has relatively outperformed the international markets, except for the Brazilian market, which gave a return of 16 per cent. There is even a fund dedicated to the Brazilian market available in India, “HSBC Brazil Fund” that returned 9% in the last one year. Even from a tax perspective, after 2018 budget, investment in international fund has become less taxing as the government has imposed 10 per cent long-term capital gains tax on domestic equities, which has narrowed the tax rate at which both types of funds are taxed.

Types of International Funds

There are broadly three types of international mutual funds in India. The first among them are those funds that invest both in the domestic equities as well as in international equities. These hybrid funds allocate at least 65 per cent of their portfolios to domestic equities, and up to 35 per cent of their portfolios to international stocks. Templeton India Equity Income Fund and Birla Sun Life International Equity Fund (Plan B) are examples of these types. The second category of international funds employ a 'feeder' mechanism to collect funds locally and deploy them internationally completely into foreign stocks of a specific region (for instance, Franklin India Feeder Franklin US Opportunities Fund). The third category allocates funds to global equities, but based on a specific theme - popular themes include gold mining, agriculture, real estate and energy. Aditya Birla Sun Life Global Commodities Fund and ICICI Prudential Global Stable Equity Fund are such examples of global funds. Another important character of the global mutual funds is that these funds invest across the world, including the home country.

As for the tax treatment of international mutual funds, funds that invest at least 65% in Indian stocks and the rest in international stocks are categorised as equity funds. This means that like the domestic equity funds, they are subject to 10% LTCG tax on capital gains of over `1 lakh for an investment horizon of over one year. All other types of international funds are taxed like debt funds, where the long-term gain for investments over three years would be taxed at a flat rate 20% with indexation. The short-term gains of equity funds would be taxed at 15%, while for the debt funds, gains will be added to the investor’s income and will be taxed as per the applicable slab rates. Hence, investors must understand the structure of the international fund and the tax implications thereof.

Risk while investing in International Fund

Before investing in international fund you, should be aware of certain underlying risks associated while investing in these funds. Primary among them is the currency risk. Since investments in the underlying securities of an international fund are in a foreign currency, they are exposed to the currency risk. Therefore, any fluctuation in the Indian rupee against the international currency where the fund has invested will impact the fund accordingly. Besides this, many a time, countries have risk associated that are specific to them. For example, although ‘Brexit’ will have repercussions for other markets too, the British markets will be impacted more. Therefore, before committing any fund, you should take into consideration the above factors too.

Although the international funds offer you diversification, it should be used only to complement the portfolio of your domestic funds. Moreover, it should not exceed more than 5-10% of your overall portfolio.