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International Mutual Funds: What are they and How to Choose the Right One

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For Indian investors seeking to diversify their portfolios and explore global investment opportunities, International Mutual Funds are an attractive option. These funds allow you to invest in various foreign companies and markets, offering geographical diversification, exposure to global market leaders and potential currency benefits. Let’s delve into International Mutual Funds, exploring what they are, how they work and how to choose the right one to align with your investment goals.

What are International Mutual Funds?

International Mutual Funds, often referred to as global or overseas funds, are a category of Mutual Funds that invest primarily in equity and equity-linked assets of foreign companies. These funds follow a thematic approach, concentrating their investments on specific regions, countries or themes. The key distinction is that they enable Indian investors to participate in the growth and opportunities offered by international markets.

Different types of International Funds

International Funds come in various forms, each with their approach to global investing. We can classify them into three main categories:

  • Thematic International Funds

    These funds adopt a theme-based investing strategy, similar to Domestic Thematic Mutual Funds. For instance, an International Thematic Fund might focus on a specific theme, such as technology and invest in foreign companies related to that theme

  • Region or Country-specific Funds

    These funds concentrate on specific regions or countries. Examples include international funds that exclusively invest in US stock markets or those targeting Asian markets. The aim is to capitalise on the opportunities presented by these specific regions

  • Global Markets

    Unlike region-specific funds, International Market Funds invest worldwide, offering diversification on a global scale. They simultaneously build portfolios comprising stocks from various countries and regions, spreading risk and leveraging opportunities worldwide.

Advantages of Investing in International Funds:

Investing in International Mutual Funds offers several advantages:

  • Geographical Diversification

    International funds allow diversification of your investments across different economies. This diversification can help mitigate risks associated with a single country's economic performance.

  • Ownership of Global Market Leaders

    By investing in international funds, you become a shareholder in some of the world's largest and most renowned companies, such as Apple, Microsoft, Amazon and Google. You can profit from these global market leaders while enjoying their products and services.

  • Currency Diversification

    International Funds expose you to foreign currencies, offering a shield against fluctuations in the Indian Rupee's value. If a foreign currency appreciates compared to the Rupee, it can boost your returns.

How do International Mutual Funds work?

The process of investing in International Mutual Funds in India is similar to Domestic Equity Mutual Funds. Here's how it works:

  • Investment in Rupees

    You invest your money in Rupees and in return, you receive units of the international fund. The Fund Manager handles the currency conversion when making international investments.

  • Fund Manager's Role

    The Fund Manager is responsible for selecting and managing the stocks of foreign companies. They can either directly purchase stocks to build the portfolio or invest in an existing global fund with a predefined portfolio of foreign stocks.

  • Regulation

    International Mutual Funds, like their domestic counterparts are regulated by the Securities & Exchange Board of India (SEBI).

Where do different International Mutual Funds invest?

International Mutual Funds in India offer various investment options, including countries like Japan, China, ASEAN countries, Europe, Brazil and the United States. Some funds have a global mandate, allowing them to invest worldwide. The choice of investment geography impacts the fund's benchmark and potential returns. Different benchmarks have varying Price-to-Earnings (P/E) ratios, affecting future return prospects.

Taxation of International Mutual Funds

Although International Mutual Funds predominantly invest in equities, their tax treatment in India differs from Domestic Equity Funds. Returns from International Funds are taxed as per the debt taxation structure. Short-term Capital Gains (STCG), realised within three years, are added to your income and taxed at your applicable Income Tax rate. Long-term Capital Gains (LTCG), accrued after three years are taxed at 20% with indexation benefits, adjusting for inflation.

Who should invest in International Funds?

International Mutual Funds are suitable for the following types of investors:

  • Equity Investors with Diversified Domestic Portfolios

    Investors with a well-diversified portfolio of Indian companies can consider International Funds to diversify further and potentially enhance returns.

  • Investors Aiming for Global Market Leaders

    International Funds enable you to invest in global market leaders like Apple, Netflix and Facebook, which are not listed on Indian exchanges.

  • Seeking Opportunities in Different Markets

    Different markets perform differently at various times. Investing in International Funds allows you to capitalise on market opportunities when domestic markets are less favourable.

  • Long-term Investors

    To fully leverage the benefits of International Funds, investors should have a long-term investment horizon of at least five years to withstand market volatility and benefit from compounding.

Things to consider before investing in International Funds

Before investing in International Mutual Funds, consider the following factors:

  • Portfolio Focus

    Different International Funds have varying investment strategies and portfolios. Ensure that the fund's approach aligns with your investment objectives.

  • Investment Risk

    International Funds are subject to economic and political risks in foreign markets. Economic instability or political unrest can impact your investments.

  • Currency Risk

    Currency fluctuations can affect your returns. If the foreign currency appreciates against the Indian Rupee, it can boost your portfolio, but depreciation can have the opposite effect.

  • Expense Ratio

    Understand the fund's expense ratio, which covers administrative and operating expenses. It is an annual charge that affects your returns.

Choosing the Right International Fund - 3 Steps to Follow

Selecting the right International Mutual Fund involves careful consideration.

Step 1: Identify Sub-Category

Choose a sub-category of International Funds that aligns with your investment goals, favouring diversified portfolios over thematic schemes.

Step 2: Select Geography

Decide on the geographical focus of your investment. You can opt for global funds or target specific countries/regions based on your preferences.

Step 3: Compare Performance

Assess the fund's consistency of returns and how it performs against its chosen benchmark. Consider the expense ratio, investment style and fund management approach.

Top 5 International Mutual Funds

Here are some top performing International Mutual Funds in India, based on their returns in the last 3 and 5 years:

Fund Name

3-Year Return

5-Year Return

ICICI Prudential US Blue-chip Equity Direct Plan-Growth

12.09%

15.88%

DSP World Mining Fund Direct Plan-Growth

12.04%

15.82%

Franklin India Feeder Franklin US Opportunities Direct Fund-Growth

5.26%

15.68%

Nippon India US Equity Opportunities Fund Direct-Growth

9.81%

15.24%

DSP US Flexible Equity Direct Plan-Growth

12.10%

15.96%

Conclusion

International Mutual Funds offer Indian investors a gateway to global markets and a means to diversify their portfolios beyond domestic boundaries. Whether you want to tap into global market leaders, seek opportunities in different economies or secure currency diversification, these funds can be valuable to your investment strategy. By understanding how International Funds work, assessing their risks and following a systematic approach to selection, you can make informed decisions and benefit from the opportunities presented by international markets. Remember that International Funds, like all investments, should be chosen based on your financial goals and risk tolerance.

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