Dalal Street Investment Journal

Add International Flavour To Your Portfolio

One of the hallmarks of investing in mutual funds is their ability to allow investors to allocate their investments into different asset classes like equity, debt and gold. An asset allocation strategy holds the key to consistent investment success as it not only ascertains the kind of risk one is taking, but also the kind of returns one can expect.

However, one category that hasn’t yet caught the fancy of Indian investors is international funds. International funds launched by Indian mutual funds are mostly “fund of funds” that invest in existing global funds. These global funds, in turn, invest in companies within a country or region, as per its stated investment objective and strategy.

In other words, by investing in an international fund, an investor can diversify his/her investments geographically. This certainly adds a new dimension to diversification as international markets are un-correlated in a number of ways. Besides, one gets an opportunity to invest in economies that either have a current account surplus or very low fiscal deficit.

At present, mutual funds offer international funds that either follow a certain theme like investing in companies associated with commodities, agribusiness and emerging markets or invest in a specific country or region such as Brazil, United States, Europe, China, Latin America and ASEAN countries. Needless to say, one has to be careful while selecting these funds as there can be a wide variance in their performance and potential.

While international opportunities deserve a closer look, the core of the equity portfolio has to be domestic equity funds. Moreover, a retail investor, who is in the process of building his/her equity portfolio, should not be in a hurry to invest in these funds. However experienced investors, with a decent sized equity portfolio, can definitely include international funds in their portfolios. As a rule of thumb, around 10 per cent of the portfolio can be invested in these funds.

Investing in international funds, in a disciplined manner through SIP, can be a good idea. Considering that currency fluctuations can impact returns significantly, regular investments through SIP can help in making investments at different levels. This evens out the impact of currency fluctuation over time. Remember, while a depreciating Rupee can enhance returns, a rising Rupee can negatively impact the returns.

However, investors must know that there are certain limitations of investing in international funds. While on one hand investors may get exposed to geopolitical risks, on the other, the post tax returns suffer as tax benefits applicable are those of debt funds. Therefore, long-term capital gains are taxed at 10 per cent (without indexation) and 20 per cent (with indexation). Similarly, short term capital gains are tax at one’s applicable tax rate.

Overall, the benefits of investing in international funds outweigh its limitations. For those looking to invest in these funds, currently the US and European markets present interesting investment opportunities. While a US focused fund allows an investor to benefit from an economy that is already on the recovery path, one also gets an opportunity to invest in leading international companies. Since the GDP growth in core Europe is slowly and steadily improving, the European markets appear attractive. In fact, lower valuations of European companies hold the potential to offer higher returns than funds focused on the US.