7 MinsNov 05, 2020
Just as a wholesome meal that includes various food groups, such as vegetables, pulses, cereals, meat, etc, carries health benefits; your investment portfolio also needs to be well-diversified, for better risk-adjusted returns.
A robust portfolio is one that is not just diversified across asset classes (equity, fixed income, gold, real estate), but also possibly within each asset class, across issuer of securities, time horizon (addressing short-term as well as long-term
financial goals), and geographical boundaries.
Mutual funds as an investment avenue offer this diversification with a variety of categories and sub-categories. One such category of funds is International Funds, which allow you to invest in overseas companies. Such funds are also called Offshore
Funds or Global Funds.
What is an International Fund?
International Funds invest in companies listed overseas. They could either invest in companies operating in a particular region or a country, such as Asia, Asia Pacific, Greater China, Japan, Europe, United States, Brazil, etc.
Or they could invest in companies as per different sectors/themes, across geographies, such as global commodity, global real estate, world mining, world energy, world agriculture, US technology, global consumer opportunity, global brand, etc.
[Also Read: How to minimize your mutual fund losses]
How does an International Fund invest?
International Funds are either actively managed and invest primarily in securities of foreign companies listed in foreign markets directly, or invest in international indices, such as the Nasdaq or S&P 500.
Usually, International Funds follow a Master-Feeder structure. You invest in the Feeder Fund, which is available domestically. The Feeder Fund then invests the assets in the Master Fund off-shore. The Master Fund then deploys the money into the
capital markets in a specific foreign country/region or an international theme, as per the scheme mandate.
Here are some benefits of investing in international funds:
- You get the benefit of diversifying across geographical boundaries -- a bigger market -- whereby the concentration risk to the country of residence (domestic economy) is reduced. Do note, no single country outperforms its global peers year-on-year.
- You get the opportunity to hedge against unfavourable local events – be it political instability, policy changes, and/ or socio-economic issues – which otherwise may have a bearing on the returns clocked by the domestic portfolio.
- You also get exposure to promising themes (such as global consumption, real estate, world energy, technology, etc.) and countries with better growth opportunities across regions.
- You have the opportunity to invest in global brands and sectors that may not be listed in the country of residence or domestic economy.
- International funds can act as a hedge against currency movement as they invest in foreign currency-denominated stocks. This could prove useful particularly when you are planning for child’s higher education overseas, say the USA, and
your home currency is depreciating against the greenback. That said, choosing an appropriate scheme and allocating the right amount by aligning the envisioned goal (considering the present value and future value of the goal) is important.
- They serve as protection to your core domestic portfolio, which may be dedicated to fulfilling other goals in the country of residence. Hence, investment in international funds could act as an effective diversification tool and may help to
earn better risk adjusted returns.
And in addition to the above, when you invest in overseas markets through mutual funds, you gain from the expertise of professional fund managers who do the difficult task of selecting
securities and portfolio monitoring.
That being said, International Funds carry certain risks. Let’s see what some of them are.
- Country specific macroeconomic risk – Every country is prone to economic setbacks. In addition to systemic risks, there are also country-specific factors such as political environment and economic policies that
could weigh on the performance of an International Fund.
- Geopolitical risk – Geopolitical tensions may harm the investment climate. These include the country’s stance regarding its trade policies with its peers, visa laws, and situation along the borders with neighbouring
countries, among others.
- Regulation risk – The regulatory environment varies from country to country. So, although the country or region may offer promising investment opportunities, the regulatory environment
and diktats, at times, may prove unfavourable to foster investments and economic growth.
- Currency risk - Fluctuation in the exchange rate may also potentially impact your returns. For instance, if you hold an International Fund that invests in the US market, your returns may drop if the Indian rupee appreciates
vis-à-vis the US Dollar. Also, keep in mind that a country's currency is susceptible to appreciation or depreciation depending on the policy stance of the Government and Central bank and the financial health of its economy.
Who should invest in an International Fund?
You may consider investing in an International Fund if:
- You want to take exposure to the growth opportunities available outside India.
- You are seeking diversification benefits by investing in international equities.
- Your investment time horizon is at least 5 years.
You may consider holding up to 10% of your mutual fund portfolio in International Fund/s.
How are International Funds taxed?
International Funds are taxed as debt funds unless 65% of their assets are held in Indian equities. Short-term Capital Gains (for a holding period of 36 months or less) will be taxed as per your tax slab (as per the marginal rate of taxation),
while Long-term Capital Gains (for a holding period of 36 months or more) will be taxed at 20% with indexation benefit.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision