International mutual funds as a category have gained both
prominence and acceptance in recent times by the average retail investor.
This should not come as a surprise given the recent
outperformance by international mutual funds compared to the Indian markets.
So keeping in trend with investors hopping on to the latest
fad that has outperformed, aum for international mutual funds has spiked up
considerably.
As unhealthy as this trend may be, it is here to stay considering
recent returns trumps planning when it comes to most retail investors and their
portfolio creation.
What
is an international mutual fund?
An international mutual fund is any fund that invests
outside Indian markets.
This could be both region specific or theme specific.
An international mutual fund can either invest directly or in
another fund, better known as fund of fund.
Their correlation with the Indian markets would differ
depending upon where you invest geographically.
The lower the correlation, the better for diversification.
They work as a very good hedge against
currency volatility.
International
mutual funds in India (types)
International mutual funds in India can be divided in
the following manner:
Global fund
A global fund is one which can invest globally, meaning it
is not restricted by a region or country.
Country fund
A country fund is one which will invest only in a particular
country like Japan, China, Brazil, etc.
Regional Fund
A regional fund is one which will invest only in a
particular region like say Europe, Asia, etc.
Thematic & Sectoral fund
Thematic and sectoral funds are global funds that invest in
a particular theme or sector like say natural resources, technology, water,
etc.
There are certain international mutual funds that invest in
certain themes but are restricted to a certain region.
Like for example technology related fund investing in
companies based in the US.
Difference
between Global and International mutual fund
An international mutual fund is one that invests in specific
countries or regions.
A global fund on the other hand is not restricted by
specific countries or regions.
A Europe based fund is an international mutual fund since it
invests only in Europe, a specific region.
A global brand fund or a global mining fund is a global fund
since it invests across the globe with no region restrictions.
International
mutual funds taxation
International mutual funds for taxation purpose are treated
as debt mutual funds.
The taxation rules that are applicable on debt mutual funds
are applicable on international mutual funds too.
It is the same for all international mutual funds
irrespective of the theme or geography.
Meaning a European based international mutual fund will be
taxed just as a US, emerging markets or Asia based.
A technology based international mutual fund will be taxed
in the same manner as a natural resources fund.
Taxation for international mutual funds can be better
classified further into LTCG & STCG
LTCG
Long term capital gains tax
is charged on gains from international mutual funds held for more than 36
months.
The LTCG rate is 20% after
indexation.
STCG
Short term capital gains tax
is charged on gains from international mutual funds held for less than 36
months.
Short term capital gains are added to your income and taxed
as per your income tax slab.
These funds are also charged 0.005% stamp
duty like any other mutual fund.
Additional reading: Click Here to read more about some mutual fund mistakes you can avoid
Advantages
of International mutual funds
Low Co-relation
International mutual funds have a very low co-relation to Indian
based mutual funds.
This stands true for global funds as well.
Due to a low co-relation, they provide
diversification in the true sense.
More often than not investors invest in various funds with
the aim of diversification but end up unknowingly investing in the same set of
companies or strategy via different schemes.
Diversification
The biggest advantage of international mutual funds is that
they provide diversification.
They are very rarely the first fund of a new investor or
even take up the major portion of anyone’s portfolio.
They are usually an afterthought or take up a very small portion
of a mutual fund portfolio.
They invest in companies and markets that Indian based
mutual funds do not.
Exposure
An international mutual fund can give you exposure to
companies and markets that an Indian based mutual fund cannot.
For example, it can invest in a search engine giant like
Alphabet which is not possible with Indian based mutual funds.
Another advantage with exposure is the option to pick a
company with an attractive valuation which is listed across various
geographies.
For example, Nestle is listed both in India as well as in
foreign markets.
Disadvantages
of international mutual funds
Taxation
For the purpose of taxation, international mutual funds are
treated as debt mutual funds.
This makes it less desirable than Indian based equity mutual
funds which have a far more attractive taxation system.
If you are an investor that frequently invests and redeems
based on random advice then this makes it even far less desirable.
Understanding the market
Whatever international mutual fund you pick, understanding
the fund and its underlying strategy is very important.
This is as true for an international mutual fund as it is for
an Indian based mutual fund.
Sadly far too many investors go about choosing funds based
on their recent returns with no understanding and end up frequently entering
and exiting funds.
This only adds to their charges with exit loads and
taxation.
You should not be investing in international mutual funds
merely because you can.
You should only if you have a plan and a very good
understanding of the fund and the underlying strategy of the fund.
Sadly many investors venture into international mutual funds
out of fear of missing out, that is not a good enough reason to invest in
international mutual funds.
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