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International Mutual Funds – Meaning, Benefits, Features & Funds to invest

international mutual funds
international mutual funds

Introduction

Currently, one can observe that there has been a lot of buzz around international equity funds in the mutual fund domain. These funds have become popular over the past year. This is due to US markets performing well, unusually the large caps. An Indian investor can choose to invest outside India through an international or global mutual fund category.

What are international mutual funds?

International mutual funds are those who primarily invest in equity, equity-related instruments and debt instruments of companies listed outside India. Overseas or foreign funds are other names for these funds. The fund invests its accumulated money in the stock market of countries like the USA, Canada, Brazil, etc.

An investor who is looking for a long term investment can prefer this as an alternative in their portfolio. This fund can yield higher returns to investors who come along with a better understanding of risk. Increasing awareness about mutual fund investments, the need for portfolio diversification has also increased. A diversified plan not only spreads the risk but also gives an investment opportunity to enter across different markets, sectors, risk classes, etc. 

This fund helps to take advantage of global stock markets. However, understanding the market movement of these markets and economic changes and their impact on fund investment is very difficult.

What are US Equity Mutual Funds?

Most of the equity mutual funds in India invest in the Indian equity market. However, few funds invest exclusively in US equity markets as well. These funds are US Equity Mutual Funds. Similar to Indian equity mutual funds, US equity mutual funds have specific mandates under which they operate.

In multiple cases, the US equity mutual fund is a feeder fund that invests into a master fund. In other words, when a person invests in a feeder fund, the money is invested as it is into the master fund. Therefore, a feeder fund is just an added layer on top of the underlying mutual fund/ETF

For example – ABC company fund of funds invests all the money received from the investors in XYZ company (US-based). Since the XYZ company does not have a presence in India, the ABC company fund pools the money from the Indian investors. This eliminates the risk for Indian investors for direct exposure to US equity markets. In some cases, the fund manager actively manages the fund.

Types of international mutual fund

The following are the types of international mutual fund –

Global Funds

Global funds and international funds might sound like synonyms. However, they are not the same. Global funds invest in companies anywhere around the world. It can also include the country in which the investor resides. On the other hand, international mutual funds invest in companies around the world except for the country in which the investor resides. 

Regional Funds

Regional funds are funds that invest in companies from a specific geographical region anywhere in the world. For instance, a specific geographic region can be Europe, Aisa, the United Kingdom, etc. Some investors who have thorough knowledge about a particular area focus on buying multiple regional funds instead of global funds.

Country Funds

As the name suggests, country funds invest in companies belonging to one foreign country. For instance, a US country fund can be where they invest in stocks and securities of the United States of America. This enables the investor to benefit from the country’s specific economy. This is the most comfortable way of investing internationally. As the data is not spread across various countries.

Global Sector Funds

Global sector funds invest in companies that belong to a specific sector across foreign countries. The primary focus is to gain exposure to a particular sector. Therefore, if an investor is interested in one specific sector, they can invest and take advantage of the same. 

Benefits of investing

Investing in international mutual funds has its own benefits –

Geographical Diversification

The returns of an investor investing in Indian stocks are affected by the performance of the Indian markets. However, by adding exposure to these mutual funds in the investor’s portfolio increases the geographic diversification. It also allows the investors to earn from the market cycle of other country’s economies.  

Portfolio Diversification

Diversification is key to a sound investment portfolio. International equity mutual funds are for higher risk tolerance investors, who are looking for portfolio diversification through investment in overseas markets.

Professional Management

A fund manager can invest the investor’s money in the right places with the help of detailed data, technical expertise and experience of investing in foreign markets. This will help any new investor to take an opportunity in foreign markets through an international mutual fund.

Cost-Effective Portfolio

One can also utilise the exposure of these funds by aligning towards their financial goals like a child’s higher education, marriage, etc. Investors can balance their portfolio, considering the overall value. The Indian equity markets are at high valuations. So, picking the right fund can build a cost-effective portfolio for the investor.

Limitations of investing

Market Risk

The foreign country’s market fluctuation or sectoral fluctuation can impact the overall performance of the fund. Hence, one needs to have knowledge about the same before investing in international mutual funds.

Constant Vigilance

Investors need to keep track of different market movements. Any political, social or economic changes of the country can impact the market performance of that country. Subsequently, this can affect fund performance.

Liquidity

In some foreign markets, securities trade less frequently. In such cases, it becomes difficult to buy or sell a few individual securities. This can either reduce the profits or increase losses for the investor.

Less Information

Fund managers might not follow a foreign company regularly. As a result, investors tend to make their decision based on the information that is not complete.

Who should invest in international mutual funds?

  • Investors who are looking for a diversified investment portfolio through foreign equity markets can consider investing in international equity funds.
  • Also, those investors who have time to study global markets and knowledge of financial instruments and the factors that affect them can consider investing in an international equity fund.
  • Those who have a better understanding of risk and have a long term horizon of investment (at least more than five years), seeking exposure to foreign equities.
  • Investors who are comfortable with the fluctuations in their investment value.
  • Investors should also be comfortable with other risks of foreign markets like political risks, economic risk and market movement risks.

Top performing US equity funds to invest in 

The following are the top performing US equity funds that one can choose to invest.

How to invest through Scripbox?

One can invest in a mutual fund through SIP or lumpsum. Suppose an investor has a considerable investment amount. In that case, they can make a lump sum one-time investment for a long term period. Similarly, one can choose SIP if an investor wants to invest regularly, maintaining an investment discipline. One can select SIP mode as monthly, quarterly, half-yearly or yearly. For first time investors, experts usually recommend SIP.

One can invest through online or offline mode. However, making offline investment involves a lot of paperwork and other issues. In this digital world, it is better to choose an online platform for investment. The following is an easy way to invest in the online platform of Scripbox.

  • Firstly, to start investing with Scripbox, one has to choose a plan.
  • Secondly, they should set up an investment account.
  • The next step is to make the payment. The payment can be done instantly or can be set up for a later date.
  • The money gets deducted from the bank after payment confirmation. The money gets transferred to the respective mutual fund house.
  • Finally, the mutual fund company allots units to the investors. The same is confirmed via email or SMS. This gets updated in the Scripbox account.

Tax on US equity funds

There is a difference in the taxation of Indian equity mutual funds and US equity funds. The international equity mutual funds or US equity mutual funds attract Indian debt taxation. There are short term capital gains, and long term capital gains tax.

Short term capital gains

If the holding period of the fund is less than three years, then the capital gains will be taxed as per the investor’s tax slab(can be as high as 30% plus surcharge and cess).

Long term capital gains

If the holding period of the fund is more than three years, then capital gains will be taxed at 20% with indexation benefit.

However, in India, the long term capital gains (over one year) on equity funds are tax-free up to INR 1 lakh per year, and beyond that are taxable at 10 % plus surcharge and cess. 

Things to consider before investing

There are multiple factors that one must consider before investing in international mutual funds.

Risk

Investing in international mutual funds comes with some risk. The primary one is currency risk. Suppose an Indian investor chooses to invest in US equity funds or international funds. In that case, they must consider rupee appreciation or depreciation. If the rupee falls against the dollar, then the NAV of the fund increases. In simple words, one gets more rupees for each dollar. Similarly, if the rupee rises against the dollar, NAV of the fund falls. 

Macroeconomic Factors

The social aspects, economic aspects of the political situation of the country have a significant impact on the performance of the fund. Hence, one must understand and keenly observe these foreign markets before investing. 

Multiple Markets Benefit

Investing in international mutual funds gives an investor exposure to different foreign markets. This can help them earn better returns. It also helps them diversify their investment portfolio, also boosting the quality of the portfolio.

Expense Ratio

As mentioned above, most of the international funds or US equity funds are fund of funds (FoFs). These funds charge regular expenses as well as the expense of the underlying international scheme in which they are investing. As a result, the cost will be high when compared to standalone funds. One also needs to check the total expenses before investing in these funds.

Longer Settlement Period

Comparatively, International equity mutual funds have a more extended settlement period of 5 days while Indian equity funds have three days of settlement. In other words, it will take five long business days for the money to get credited to the investor’s account after a redemption request.

The investor must have a proper understanding of the pros and cons of international mutual funds or US equity mutual funds. They should be able to diversify their portfolio based on their financial needs, future financial goals and align their investments.

Published on September 10, 2020