What are International Mutual Funds

International funds are mutual funds or ETFs that invest in companies outside the investor's country of origin. Explore everything about International funds in this blog.
EXPLORE FUNDS
International Mutual Funds
EXPLORE FUNDS
4 mins
24-June-2024

Investing in mutual funds is a great way to diversify your portfolio and earn returns on your investments. International mutual funds are a type of mutual fund that invests in foreign markets. In this article, we will discuss what international mutual funds are, how to invest in them, how they work, who should invest in them, taxation on international mutual funds, factors to consider before investing in them, and the advantages of foreign funds.

What are International Mutual Funds?

International mutual funds are mutual funds that invest in foreign markets. These funds invest in stocks, bonds, and other securities of companies listed outside India. The objective of these funds is to provide investors with exposure to foreign markets and diversify their portfolio. International mutual funds are managed by professional fund managers who have expertise in investing in foreign markets.

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How do international mutual funds work?

International mutual funds work like any other mutual fund. The fund manager pools money from investors and invests it in foreign markets. The returns on these funds depend on the performance of the foreign markets. The fund manager charges a fee for managing the fund, which is deducted from the returns generated by the fund.

Advantages international mutual funds

Investing in international mutual funds has several advantages:

  1. Diversification: International mutual funds provide investors with exposure to foreign markets and help diversify their portfolio.
  2. Growth potential: Investing in international mutual funds provides investors with access to the growth potential of foreign markets.
  3. Currency hedge: Investing in international mutual funds provides investors with a currency hedge against the depreciation of the Indian rupee.

What are the different types of international funds?

There are many international funds available in the Indian financial market. Each type of fund involves a unique approach towards global investing. Based on these approaches, here are three categories of international funds:

Category

Description

Thematic International Funds

These funds adopt a theme-based investing approach similar to domestic thematic mutual funds. For example, if infrastructure is the theme, the fund will invest in foreign companies related to infrastructure sectors like cement, power, and steel.

Region or Country-Specific Funds

These funds focus on investing in the stock markets of a specific region or country. For instance, there are funds dedicated to the US stock markets or Asian markets. The objective is to capitalize on the opportunities within these markets for potentially higher returns.

Global Markets

Unlike region or country-specific funds, global market funds invest across the world instead of targeting specific regions or countries. They hold stocks from various countries, aiming for diversification. This strategy helps mitigate risks by spreading investments across different markets.

 

Who should invest in international funds?

International mutual funds are suitable for investors who want to diversify their portfolio and earn returns mutual fund returns from foreign markets. These funds are also suitable for investors who want to take advantage of the growth potential of foreign markets. However, investors should be aware that investing in international mutual funds involves higher risks than investing in domestic mutual funds.

Where do different international mutual funds invest

International mutual funds in India provide a range of options for investors looking to diversify across various global regions. Popular choices include Japan, China, ASEAN countries, Europe, Brazil, and the United States. For those preferring broader exposure without geographical constraints, there are global investment funds available.

These international funds select benchmarks based on their investment regions, aiming to outperform them. Each benchmark has unique price-to-earnings (P/E) ratios and potential future return capabilities, leading to diverse performance outcomes across international funds based on their primary investment regions.

Taxation on International Mutual Fund

International mutual funds are taxed like any other mutual fund. The returns generated by these funds are taxed as capital gains. The tax rate depends on the holding period of the investment. If the investment is held for less than three years, it is considered a short-term capital gain and is taxed at the investor’s income tax slab rate. If the investment is held for more than three years, it is considered a long-term capital gain and is taxed at 20% with indexation.

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How to choose international funds

International funds offer exciting opportunities to diversify your portfolio and tap into global markets. But with so many options, selecting the right ones can feel overwhelming.

Here's a simplified guide to help you find the perfect fit:

1. Define your investment focus:

Think about your risk tolerance and long-term goals. Do you prefer established markets like the US or China, or are you drawn to the high-growth potential of emerging markets? Consider a globally diversified fund for a balanced approach or choose a region that aligns with your specific interests.

2. Prioritise diversification:

Remember, international funds are meant to spread risk and reduce dependence on your home market's performance. Avoid thematic funds like "Mining" or "Agriculture," and opt for funds with a broader range of holdings across different sectors.

3. Consistency is key:

Focus on how consistently a fund delivers returns compared to its chosen benchmark, rather than just chasing the highest numbers. A steady track record is more indicative of future success than short-term spikes.

By following these steps, you can significantly narrow down your initial choices. Once you have a shortlist of 2-3 promising funds, consider their expense ratios (annual fees) and investment styles (value, growth, or blended). Finally, factor in the fund management style (active vs. passive) to make your final selection.

Remember, a well-chosen international fund can be a powerful tool to add global growth potential and diversification to your investment portfolio.

How to Invest in International Funds?

It is simple to invest in international mutual funds. You have the option of investing in these funds via your broker or online investment platforms. To invest in international funds, you need a PAN card, a bank account, and a KYC (Know Your Customer) document. You can either make a lump sum investment or follow a Systematic Investment Plan (SIP).

Factors to consider before investing in international mutual funds

Before investing in international mutual funds, investors should consider the following factors:

  1. Risk: Investing in international mutual funds involves higher risks than investing in domestic mutual funds. Investors should be aware of the risks such as country risk, event risk, restrictions imposed overseas, economic factors etc. involved and invest accordingly.
  2. Currency risk: Investing in international mutual funds involves currency risk. The returns generated by these funds are affected by the exchange rate fluctuations between the Indian rupee and the foreign currency.
  3. Fund manager: Investors should choose a fund manager who has expertise in investing in foreign markets.
  4. Expense ratio: Investors should consider the expense ratio of the fund before investing. This is the fee that the fund manager charges for managing the fund.

Conclusion

International mutual funds are a great way to diversify your portfolio and earn returns from foreign markets. These funds are suitable for investors who want to take advantage of the growth potential of foreign markets. However, investors should be aware that investing in international mutual funds involves higher risks than investing in domestic mutual funds. Before investing in these funds, investors should consider the factors mentioned above and choose a fund manager who has expertise in investing in foreign markets.

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Frequently asked questions

How long should I stay invested in international mutual funds?

There is no definitive answer to how long you should stay invested in international mutual funds, as it depends on your risk appetite, investment goals, and market conditions. Do note that international mutual funds carry unique risks such as volatility due to geopolitical events or fluctuations in currencies. Therefore, you should have a long-term horizon  to ride out the short-term fluctuations and benefit from the growth potential of foreign markets.

Where do international mutual funds invest?

International mutual funds are equity funds, which invest in the securities and stocks of companies that are listed outside India. They aid you in diversifying your portfolio and help you make the most of growth opportunities in different markets and sectors.

Are international mutual funds high risk?

Yes, they are considered as high risk as they are vulnerable to many factors like geo-political events, currency fluctuations, and more.

Should I invest in international mutual funds?

International mutual funds buy shares of companies that are not in India. They can make your portfolio more varied, lower risk, and let you benefit from different markets. But they also have more expenses, changes in currency value, and problems with politics and economy. So, you should only put money in international mutual funds if you can wait for a long time, take high risk, and know what the fund wants to do and how.

How can international funds benefit an investor's portfolio?

International funds can benefit an investor's portfolio by providing geographic diversification, reducing risk associated with regional economic trends. They offer exposure to global markets, potentially tapping into high-growth sectors and currencies. Additionally, international funds can act as a hedge against domestic market fluctuations, enhancing overall portfolio resilience.

Which international mutual fund is best?

Defining the best international mutual fund in not so simple. The best international mutual fund varies based on your investment goals, risk tolerance, and geographical preference.

What are the disadvantages of international mutual funds?

Disadvantages include currency risk, political instability in foreign countries affecting investments, and regulatory changes impacting returns. Additionally, higher expense ratios and less familiarity with international markets may pose challenges.

Can I invest in US mutual funds from India?

Yes, Indian investors can invest in US mutual funds through platforms that facilitate international investments. This allows access to a broader range of investment opportunities in US markets, subject to regulatory compliance and currency conversion.

How much should I invest in international funds?

Financial advisors recommend allocating 10-15% of your portfolio to international funds to diversify risk and tap into global growth opportunities. The exact amount depends on your risk appetite, investment horizon, and overall portfolio strategy.

Do I need international funds in my portfolio?

Including international funds in your portfolio provides diversification across global markets, reducing overall risk exposure. They offer exposure to economies and sectors not prevalent in domestic markets, potentially enhancing returns and hedging against regional economic downturns.

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