Going Global With International Funds

Going Global With International Funds

Types of International Funds

There is a new trend now picking up momentum – investing in international funds. Such funds offer geographical diversification and the benefit of reaping rich rewards from other currencies but the question is whether they are suitable for every investor. The article explains the pros and cons

An interesting fact to note is that Indians are now rapidly becoming aware about the importance of investment since better returns help them to fulfil their demands and desires. In fact, investment has become a crucial part of every individual’s life as it enables him or her to achieve financial goals or even create wealth for a better lifestyle. Presently, there are varieties of investment options available within the category of mutual funds which might put an individual in a dilemma about where to invest his funds in order to receive optimum returns. Ideally, the portfolio of an individual should consist of diversified investment options which can aid an individual to maintain stability along with good returns.

A diversified portfolio consists of various investment options such as equity-oriented instruments, debt-oriented instruments, commodities such as gold, silver, oil, small saving schemes or fixed income instruments, etc. On the same lines, presently many investors also want some exposure beyond the Indian boundaries by investing in foreign companies. Now, how can one invest in foreign companies? The route is that of international funds. The obvious question that comes to the fore is which are the international funds that one should invest in? This question will be answered in the following paragraphs. Mutual funds offer the opportunity to invest in domestic companies through equity-oriented schemes such as large-cap funds, mid-cap funds, small-cap funds, flexi-cap funds, and many more.

Likewise, if an individual wants exposure to international companies or companies which are not listed in India then he or she can invest in international funds offered by mutual funds. International funds are those funds which invest in foreign companies. These funds are also known as overseas funds. Fund managers invest the investor’s money in two ways – either by directly investing in foreign stocks and creating a portfolio or by investing in an existing global fund which has already designed a portfolio consisting stocks of foreign companies. These international funds are regulated by the Securities Exchange Board of India (SEBI) like any other mutual fund schemes.

Features of International Funds

Risk: Risk is an inherent factor while investing in any investment instrument. Debt instruments also entail some kind of risk such as credit risk, interest rate fluctuation risk, etc. There are two key risks of investing in international funds: a) Currency Risk: This is an important aspect to consider as investment is done internationally. For instance, if you invest in a US-centric foreign fund and the rupee falls against the dollar, the NAV increases because you get more rupees for each dollar and vice versa, b) Economic and Political Risk: As international funds invest in other countries or regions, any change in economic or political conditions can adversely affect your investment in international funds. So, investors who have the capacity to take the above mentioned risks can consider investing in these funds.

• Need for Caution: Given that international funds are prone to political as well as economic changes, an investor must necessarily keep track of the market movement regularly.

• Manifold Economic Benefits: On the positive side, investing in international funds allows you to benefit from various countries’ economies and earn you optimum returns. It also aids in creating a more diversified portfolio.

• Taxation: International funds predominantly invest in equity and equity-related instruments but these funds are not taxed in the same way that domestic equity funds are taxed. Returns from international funds are taxed as debt funds. Therefore, for the purpose of taxation, international funds are treated as debt funds. As such, capital gain arising after 36 months or three years from investment is termed long-term capital gain (LTCG). This capital gain is taxed at the rate of 20 per cent after indexation benefit. Capital gain arising within 36 months or three years from investment is termed short-term capital gain (STCG). This gain is taxed as per the Income Tax slab rates applicable to the tax payer.

International Investor Profile

Who should invest in international funds? Ideally, you should invest in these funds only if you already have a well-diversified domestic portfolio and are now looking for some exposure beyond Indian borders. An individual who is fairly new to the investment world or does not possess a well-diversified domestic portfolio shouldn’t directly jump and invest in international fund as they can prove to be risky and one might end up losing money. Most investors are attracted to international funds for reasons of geographical diversification and the benefit obtained from multiple economic cycles. Such investors need to be very active in order to regularly track the international markets and current affairs. These funds are suitable for long-term investors. Those who cannot dedicate their funds at least for 5-7 years shouldn’t invest in these funds as they can be risky in the short term.

Advantages of International Funds

The following table depicts the best international mutual funds based on high returns.

Conclusion

Any investing individual should first assess his or her investment goals and objectives, risk capacity, expected returns and investment horizon before investing in international funds. Individuals looking for diversification should avoid international funds which are closely related to Indian equities or have a very high correlation with Indian equities as they will not accrue the benefit of geographical diversification. International funds are ideal for investors who already possess a well-diversified portfolio which consists of domestic companies and who have a longer investment horizon. These funds are not suitable for individuals who have a lower risk appetite as well as a lower investment horizon.

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