Should you invest in international funds?Buying foreign equity, ETF, or invest with the route of International Mutual funds can be a great way to diversify your portfolio. But first, deciding any investment. You’ll need to know how much money should be allocated to foreign equity or international funds.
In part, the answer will depend on how much risk you can take it with your current portfolio and the period of your investment tenure.
If we analyze the data, India’s share of GDP is just 3% of Global GDP, so we have around 97% untapped market where we can look upon for investment.
If we invest in domestic funds or in domestic companies for the sake of diversification. The true meaning of diversification is not all about only within the domestic economy, it implies True Diversification across countries.
History has shown us that specific countries can be hit by various political, social, economic events that can affect alone or more than the rest of the world.
INDIA is the fastest growing economy in the world, but it doesn’t risk-proof it from manmade or natural disaster. Even demonetization can have a major effect on equity and debt which can erode your wealth. But if you diversify your investment, you might avert part of those domestic risks.
However, before deciding investment in international funds, we should understand what is International funds? And how good are they in term of returns? What are the types of it, And the risk factors associated with them? And, finally, should you invest in international funds?
What are International Funds?
International Mutual funds are preferred by those investors who want to invest in securities beyond domestic equity market and across geographical barriers
International funds typically invest in full or in part through a mechanism known as “feeder” wherein funds are pooled from domestic investor and invest in to an offshore fund of the same global asset management company For Ex- Franklin Templeton mutual fund ( Franklin India feeder franklin US opportunity fund) invest in Franklin US opportunity fund that primarily invests in securities in the UNITED STATES OF AMERICA.
Pure international funds don’t follow the same taxation Rule as we get in Domestic Funds, as they are treated as a non-equity fund from a taxation standpoint and hence attract the same tax as do debt-oriented mutual funds.
Categories to invest in international funds
#By Geography-Different international funds invest in different countries and different types of market. Some schemes such HSBC Emerging Market Fund invest money in HSBC global fund which primarily invests their funds in Asia countries or Latin America.
Other funds we have Mirae Asset China advantage fund, that invests in Mirae Asset China sector leader equity funds, which itself invest in companies that are domiciled, or have activity in China and Hongkong.
Franklin India Feeder-Franklin US opportunity or icici prudential us blue-chip equity fund invests in blue-chip companies/securities that are domiciled in the UNITED STATES OF AMERICA.
#By Sectoral/Theme- Some international funds invest in companies those pertain to one sector or specific to one theme Like Gold fund, Real estate fund, Agriculture Fund. These funds are for those investors who have already invested in Plain Vanilla International funds and already invested in Domestic equity or funds but now want to buy something exotic. Investors should understand the International Market where they are investing and should have a clear view about the global market or risk associated with them before investing in these Funds.
#FoF or direct investment- Some Global funds invest directly in companies abroad. Others are FUND OF FUND; these funds collect the corpus from domestic Market and invest in an offshore Fund of the same parent company. If the fund purchases the Stocks or bond abroad directly, fund manager sits here in India and decides which stock to buy and hold.
But, in case of FOF , Indian fund manager just collect or pool the fund from here and invest in their parent fund which is managed by fund manager who is sitting in the domiciled country where the money is invested , so it is better to go with these types of funds, a fund manager who is in abroad or managing corpus know the economy very well, and it is easy for them to monitor their Own market.
Returns in international funds
If you will just see the last three months trailing returns of equity funds in India, you will find maximum all are in negative, only one category which have garnered positive returns in the same period that is International funds. According to experts, however, having 10-15% exposure of your portfolio in International Funds can make your journey smoother by counterbalancing the underperformance in Indian Markets.
In 2011, for instance, Indian Nifty has given a return of -24.90 percent, while in the same Year S&P 500 (US INDEX) fell only -1.12 percent. By investing in International markets with which the Indian market has a low correlation (Like the US market), an investor can make his portfolio More stable.
Benefits to invest in International funds
- The major benefit you could get from having the International funds in your portfolio is Currency risk if the rupee depreciates against the foreign currency you could get a better return in this scenario, so having a part of your portfolio invested in foreign currency dominated funds can safe you against the risk of rupee depreciation.
- By investing in Foreign Market or international funds you can also gain exposure to sectors which you don’t get exposure in Indian Market, such as defense equipment, global e-tailers, and so on. However, if you wanted to make an investment in a Large giant company like COLA, AMAZON, APPLE, FACEBOOK, we can invest in these companies with the route of international funds. Many of these companies are MULTINATIONAL COMPANIES, which earn their revenue and profits across the globe.
- Exposure to foreign currency can meet your future requirements like child education.
Taxation in International Funds
- All international funds are treated as non-equity funds under taxation rules.
- Gains from international funds are taxed at the marginal rate if sold within three years from date of purchase.
- Gains realized from sale after three years are eligible for indexation benefits in a year of sale (20% with indexation and 10% without indexation).
Best global funds across time frames
*US-focused funds have delivered the highest returns over three and five years.
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