International Funds: Should You Invest Now?

International Funds: Should You Invest Now?

It would be a wise decision to invest in international funds. Besides the current surge, there are a couple of other benefits that these funds offer to Indian investors.

Over the past few days, the Indian equity market has gained dramatically. In fact, it has jumped by almost 5 per cent in just a couple of days. It is the risk-on rally and a gush of liquidity globally that is helping the market to gain. No doubt this has created a wave of excitement among investors. Nonetheless, if you take a look at the world indices, the increase in Indian equity markets looks pale in comparison. Despite such gain by the equity indices in India, they are grossly under performing the global indices. And excluding the French equity index represented by CAC, the Indian equity market has remained at the bottom of the performance in every time period in the last year. International Funds: Should You Invest Now? It would be a wise decision to invest in international funds. Besides the current surge, there are a couple of other benefits that these funds offer to Indian investors



The graph below highlights the performance of the global indices against Nifty in different time periods. It clearly shows the underperformance of the Nifty. Further, the performance of these equity indices is reflected in the performance of mutual funds dedicated to such geographies. There are 34 equity mutual funds in India categorised as international funds that are investing overseas. On average, these funds in the last one year have generated returns of 11.03 per cent compared to negative 17.17 per cent generated by Indian large-cap dedicated equity funds in the same period. Hence, international funds have outperformed domestic funds by almost 29 per cent in the last one year.

Except for pharmaceutical-dedicated funds, all the other categories of equity funds in India have underperformed the international categories’ funds. Even in this category, funds investing in technology companies have done well as their businesses have not been adversely affected by the virus pandemic. Shares of e-commerce companies’ also soared as online purchase surged during the lockdown. International pharmaceutical companies too rallied on hopes of their finding a vaccine or a cure for the pandemic. Taking into account such a performance of international funds, three fund houses have launched overseas’ funds in the past 12 months, of which two have been in the last couple of months.



Nevertheless, it is not always the case that the Indian equity market underperforms. There are times when the Indian equity market has outperformed the global indices. It signifies one of the important properties of global equity returns. There is not one single market that keeps on performing all the time each time.

Investing in International Funds

Against this background, it would be a wise decision to invest in funds dedicated to international companies. Besides the current surge, there are a couple of other benefits that these funds offer to Indian investors. First, they offer geographical diversification. The purpose of diversifying a portfolio is to invest in assets that have a low correlation with your existing assets. This means that they do not move in tandem. This will help you to mitigate the impact of ups and downs in the Indian markets by spreading investments in global markets.

Correlation Between Different Global Equity Indices

The graph below shows the correlation based on daily returns of the last two years between major equity indices globally. We see that Nifty has a very low correlation with the US market represented by SPX (S & P 500) and the Japanese market represented by Nikkei. The highest correlation of the Indian equity market is with South Korea (KOSPI) and Hong Kong (Hang Seng) markets. Hence, it is quite evident that India is not strongly correlated with most of the markets and hence it makes sense to diversify into international markets. There is another way in which investing in international funds helps you to take part in the consumption boom in India.



What are International Funds?

International funds could be broadly categorised specific to exposure in a country, region or theme. For instance, there are funds that invest in countries such as US, regions like Europe and themes such as energy, commodities, real estate, and others. Some funds directly invest in overseas’ securities whereas most funds use the feeder route or ‘fund of fund’ route.

Fund of funds acts as a master fund and invests in multiple funds to achieve its investment objective while feeder funds are funds which invest in a single master fund. Tax treatment of international funds that invest at least 65 per cent in Indian stocks and the rest in international stocks are categorised as equity funds.

This means that like domestic equity funds, they are subject to 10 per cent LTCG tax over capital gains of Rs 1 lakh for an investment horizon of over one year.

All other types of international funds are taxed like debt funds, where long-term gains for investments over three years would be taxed at a flat rate of 20 per cent with indexation. Short-term gains for schemes taxed as equity funds would be taxed at 15 per cent, while for those taxed as 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 international funds and tax implications.

Exposure in India is available for the following markets:
✓ USA
✓ Europian
✓ ASEAN




For instance, there are many companies such as Amazon, Microsoft, Alphabet, Facebook, Hyundai, Sony, Walmart, etc. that are doing significant business in India but are not listed on the bourses here.

Hence, Indian investors cannot participate in the wealth created by them. Investing in international funds holding these companies helps you to get the benefit of their consumption in India. Another benefit offered by these funds is they offer a hedge against a falling domestic currency. When the local economy or the stock markets don’t do well – something that we are witnessing of late – investing in these funds makes a lot of sense. Since Indian investors’ returns are in rupee terms, any depreciation of the local currency against the US dollar will amplify returns and, to that extent, provide a natural hedge to the investment corpus. The appreciating rupee will also adversely impact the returns of your portfolio.

International Funds and Financial Goals

The purpose of diversifying your portfolio is to invest in assets that have a low correlation with your existing assets.

In addition to creating an opportunity to invest globally, these funds are perfectly suited for you to achieve certain financial goals. If you can identify your goal, the amount and the currency required, you can build your kitty by investing in funds accordingly. For example, if you want your son or daughter to do higher studies in a US’ university, you can invest in US-dedicated funds, which will not only help you to invest but also hedge your investments against currency fluctuation. Similarly, you may be looking for a vacation in Europe and can, therefore, invest accordingly. With a variety of seamlessly accessible fund options at hand, investing globally helps to attain your financial goals.

Investment Amount
Before investing in international funds you will have to build a risk appetite for such funds. This is because global equity investments bring with them country risks as well as currency risks. For example, a fund based in Brazil is the worstperforming international fund now. Nevertheless, between 2016 and the start of 2020 the fund gave returns in excess of 150 per cent. Since Brazil’s economy is very much linked with commodities, and especially oil, and fall in commodity price or oil negatively impacts the economy and funds dedicated to this geography. Therefore, although international funds offer you diversification, they should be used only to complement the portfolio of your domestic funds. Moreover, it should not exceed more than 10-15 per cent of your overall portfolio.

❝ In my 45-year career as an investment counsellor, humility did show me the need for worldwide diversification to reduce risk. ❞

- Sir John Templeton 

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