As time passes by, the world is becoming smaller, don’t you think? We can now connect with someone sitting on the opposite side of the globe within just a blink of an eye. We can use products which are manufactured across the globe. It can simply be ordered online. However, when it comes to investment, Indian investors are still largely limited to investing within the geographical boundaries of the country.
India is the fifth-largest economy at present and has a market capitalization of US$ 2.1 trillion. While the combined total of all the countries is US$ 90 trillion. So, there is a market of US$ 90 trillion out there for you to explore.
What are International Mutual Funds?
International mutual funds are funds where the asset management company invests in the international equity market and debt market. So you, as an investor, can invest in your currency, but the investment will be deployed in international markets. You will receive the returns according to the market performance.
Types of International Mutual Funds
There are different types of international mutual funds and they are categorized according to multiple criteria which are –
1. Investment Route:
The first classification is based on the investment route. Here the fund houses invest directly into the international equity market or the indices. There can also be feeder funds that invest in a master fund or fund of funds of foreign countries.
2. Geographic location:
Then the international mutual funds can be classified according to geography. There are global funds that invest across the globe in any country. Then there are country-specific funds, where the fund house invests in the equity market or other markets of some specific countries. Finally, there are region-specific funds that invest in markets of particular regions like Europe, ASEAN, and others.
3. Investment Theme:
The final classification is based on the theme of investment. International mutual funds can be invested across multiple sectors or in a specific few or one sector.
Benefits of investing in International Mutual Funds
The benefits of investing in international mutual funds are –
Firstly, you can get exposure to different currencies. And benefit from the depreciation of the Rupee. As the investment you do in INR, thus the NAV you can monitor in INR only. In the last thirty-five years, the rupee has depreciated by around 6%. So, when the NAV of the funds is declared in INR, you can benefit from this.
In the past 10 years USD has appreciated 1.6x against the INR. While investment in S&P 500 in USD has grown 3.3 times, in INR it has grown 5.5 times during same period. USD appreciation against INR has resulted in higher returns.
Source: Morningstar Direct
Secondly, you can exceptionally diversify your investment portfolio. There are so many asset classes to invest in. You can invest in different asset classes using international mutual funds. You can invest in the funds which include some of the top companies of the world.
The correlation between the markets of different geographical regions is pretty low compared to within the same region. So, when you invest in funds in the international market, the correlation decreases and thus increases the chances of making more profit.
The table below shows there is no perfect correlation between any of the indices of different geographies.
IISL Nifty 50 TR INR
MSCI EM NR USD
S&P 500 TR USD
MSCI Europe NR USD
MSCI China 10-40 GR USD
Nikkei 225 Average TR JPY
Hang Seng HSI GR USD
IISL Nifty 50 TR INR
1.00
0.74
0.69
0.70
0.49
0.54
0.57
MSCI EM NR USD
1.00
0.81
0.85
0.88
0.70
0.86
S&P 500 TR USD
1.00
0.89
0.69
0.84
0.66
MSCI Europe NR USD
1.00
0.67
0.86
0.72
MSCI China 10-40 GR USD
1.00
0.59
0.91
Nikkei 225 Average TR JPY
1.00
0.63
Hang Seng HSI GR USD
1.00
Data as on 31st January 2021. Source: Morningstar Direct
Geographical Diversification: Differenteconomies perform differently in a given period of time. Exposure to various geographies ensures that portfolio does not depend on economic situation of single market. So, international funds help you leverage opportunities in these markets while the Indian economy is not able to generate good returns. InCY 2011Indian benchmark index Nifty 50 slipped to the bottom while in 2012 it topped the charts when compared to other major global indices.
Tax implications on International Mutual Funds
The profits from international mutual funds are taxed under the Income from the capital Gain section. If you held the fund for less than equal to three years, then the short-term capital gain tax would be implied and taxed according to investor’s income tax bracket. While investment in the funds for more than three years will make the profit eligible for taxation under the long-term capital gain tax, profits are taxed at a rate of 20% percent after indexation.
If you want to widen the range of your investment, or diversify your portfolio to a further extent, and invest in global markets, international mutual funds can be a great option. These funds have a lower correlation with the domestic funds, so you can create a well-diversified portfolio mixing both domestic and international funds to reduce the risk and optimize the profits. However, one need to check investment theme or portfolio of the fund before making investments. As international funds invest in different economies, they are prone to economic risk due to change in government, political instability, economic sanctions, currency risk due to central bank rates, inflation or prices of commodities or risk due to adverse events such as strikes, wars, or natural calamities etc. Our specialised team at Tata Capital Wealth can help you pick fund which suits your needs efficiently.
05 August 2021
5 mins read
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