International Mutual Funds : Types, Benefits & Factors

What are International Mutual Funds?

International Mutual Funds are described as funds in which an investor invests in securities of foreign countries. As a result, these funds are sometimes referred to as Foreign Mutual Funds or Overseas Funds. Over the last decade, there has been an increase in knowledge of global investment potential. Investors seek to explore worldwide markets and maximise their earning potential. As a result, several international funds with various portfolio compositions and structures have been launched.

Key takeaways from International Mutual Funds:

• International Mutual Funds are the funds where an investor invests in foreign securities.
• Investing in foreign countries comes with a greater risk and volatility.
• International Mutual Funds are also known as Foreign Mutual Funds and Overseas Funds.

Types of International Funds

1. Thematic International Funds: These funds are similar to domestic-themed mutual funds in that the fund invests based on a theme. For Example, a domestic thematic fund with the topic of infrastructure will invest in stocks of cement, electricity, and steel companies. Similarly, an international thematic fund will invest in the stocks of overseas firms that belong to the theme. 

2. Region or Country-Specific Funds: As the name implies, these funds invest in the stock markets of a specific region or country. For Example, an international fund that exclusively invests in US stock markets, or a fund that only invests in Asian markets. The primary goal is to profit from opportunities generated by these marketplaces.

3. Global Funds: They are incompatible with regional or country-specific funds rather than focusing on just one country or region, these funds invest globally. They have a portfolio consisting of stocks of companies from all across the world. This implies that they take advantage of opportunities in different markets at the same time. The primary aim here is diversity. Even if one of the markets underperforms, the investor’s investments in other markets will save the day.

Advantages of International Funds

1. Geographical Diversification: Investing in international funds has several advantages. However, diversification is the most significant advantage provided by international funds. Different economies perform differently over the time. There may be times when the Indian economy struggles while the US, UK, Chinese, or Japanese economies are booming. So, International funds can help investors capitalise on possibilities in these markets when the Indian economy cannot. As a result, spreading the overall investment across geographies will offer global diversification.

2. Opportunity to Become Global Market Leaders : By investing in international funds, investors become an owner in some of the world’s largest corporations, like Apple, Microsoft, Amazon, and Google. Investors may be both an owner and a customer of their favourite brands. As a result, when investors invests in these firms through foreign funds, they have share in respective firm’s profits.

3. Currency Diversification: If we examine at the rupee’s recent trajectory when compared to the dollar, we can observe that its value has only fallen. The Indian rupee was valued at ₹45 in 2000, and it is currently trading above ₹80. There are several reasons for this devaluation, ranging from political uncertainty to rising inflation levels to inadequate fiscal policies. Investors can take advantage of the rupee’s depreciation by investing in foreign funds.

Factors to Consider Before Investing in International Mutual Funds in India

1. Know Where to Invest: Different foreign funds have distinct investment strategies based on which their portfolios are constructed by their fund managers. There are funds that invest in both Indian and foreign equities. Some funds solely invest in stocks of emerging markets. There are several foreign funds with varying portfolios. As a result, investor should be aware of where to invest their funds, and it should be consistent with investing objectives.

2. Investment Risk: Even though international funds have several advantages, investors should be aware of some of the risks associated with mutual fund investment. The two main risks of investing in foreign mutual funds are as follows:

• Economic & Political Risk: Economic and political factors have a significant impact on Indian domestic markets. As a result, any political or economic disturbance would have an impact on domestic investments. As international funds invest in different nations or areas, changes in the economic or political conditions in other countries or regions might have a negative influence on your investment in international funds.
• Currency Risk: Your rupee investment is converted into a currency depending on the investment strategy of the international fund. So, if a fund takes a country-specific approach and invests in US markets, your rupee investment will be converted into US dollars (USD). If the US currency rises against the Indian rupee, you will benefit. However, if it depreciates in value against the rupee, it would have a negative influence on your portfolio.

3. Expense Ratio: Before investing in international funds, investors should be aware of the expenses that will cut the profits they make. Asset management companies will charge investors a fee known as an Expense Ratio. This fee covers the fund’s administrative and operational expenditures such as the fund manager’s salary. It is payable on an annual basis.

Taxation on International Mutual Funds

Although foreign mutual funds contain equity investments as their underlying asset, they are taxed in an unusual way. It is logical to expect that they will be taxed in the same manner as all other equity mutual funds in India. However, this is not the case. International fund returns are taxed in the same manner that debt fund returns are. A capital gain occurs when you earn from the sale of your investment. The capital gains from selling your investment are taxed based on how long you hold your investment under the debt taxation structure. The same is true with other international funds.

1. Short-Term Capital Gain (STCG): A short-term financial gain occurs when you redeem your international fund investment within three years. These gains or profits are added to your income and taxed based on your tax rate.

2. Long-Term Capital Gain (LTCG): If you redeem your mutual fund after three years or longer, your profits are considered long-term capital gains (LTCG). Such profits are taxed at 20% after indexation, i.e. adjusting your returns for inflation.