International Mutual Funds 2022 – Types & How to Invest in Foreign Mutual Funds
What are international mutual funds? An international mutual fund is a fund that invests in debt securities, commodities, or shares of companies that are located anywhere in the world outside the investor’s country of residence. For example, for an investor residing in India, an international mutual fund is a fund that invests in shares of foreign companies (for example, US-based Apple or Facebook) listed on foreign stock exchanges (for example, NASDAQ) outside India.
International funds, also referred to as foreign funds or overseas funds, can give Indian investors exposure to global companies like FAANG stocks (Facebook, Amazon, Apple, Netflix, Google) etc. You can diversify your portfolio beyond India with these funds.
Why should an Indian investor invest in international mutual funds?
There are several advantages for Indian investors to invest in international mutual funds. Some of these include:
Earn superior returns as compared to those given by Indian companies
India is a developing country, and Indian companies have a lot of potential to grow and deliver good returns to Indian investors. In the past, Indian companies have delivered good returns and are expected to do so in the future also. However, India is not always the best-performing market. The best performers keep rotating among India, US, China, and others.
Image: Performance of various markets in the last ten years | (Source: https://www.miraeassetmf.co.in/)
Note: The above data is based on MSCI country indices (large-cap + mid-cap)
As seen in the above table, in the last ten years, India has been the best performing market only in two years (2012 and 2014). The US has been the best performing market in six of the last ten years. Hence, Indian investors need to diversify beyond India and invest in international mutual funds with exposure to the US and other countries.
- Benefit from the Indian currency’s depreciation
The Indian Rupee (INR) has steadily depreciated against the US Dollar (USD) over the years. When you invest in foreign currency such as the US Dollar, the depreciation of the Indian Rupee enhances your net returns.
Image: Rupee depreciation enhances your net returns | (Source: https://www.miraeassetmf.co.in/)
As seen from the above image, in the last 13 years, the MSCI USA Index has given 15.26% CAGR returns in Dollar terms. But, due to Rupee depreciation, for an Indian investor, the net returns are 19.28% CAGR in Rupee terms.
- Diversification to reduce country-specific risk
The correlation between Indian markets and other global markets is low. When the Indian markets are not doing well, other global markets may be outperforming. Hence, the Indian investor should diversify beyond India to reduce country-specific risk.
Image: Correlation of Indian equity return with other equity markets is low | (Source: https://www.miraeassetmf.co.in/)
Note: The above data is based on MSCI country indices (large-cap + mid-cap). The data from 1st Jan 2009 to 31st Dec 2020 is considered for computing correlation between the returns.
As seen from the above image, the correlation of Indian equity returns with other equity markets is very low. Hence, an Indian investor should allocate a certain portion of their asset allocation to international equity markets.
- Invest in opportunities that are not available in India
International equity markets like the US (NASDAQ) offer investors an opportunity to invest in global companies such as Apple, Amazon, Facebook, Google, etc. Many of us Indians are users of the products and services of these companies. However, as investors, we don't have the opportunity to invest in these companies through Indian stock exchanges. We can invest in these companies only by buying their shares directly through US stock exchanges or international mutual funds offered by Indian AMCs.
Types of international mutual funds
There are various types of international mutual funds available to Indian investors for investment. Some of these include:
Global mutual funds: These funds invest in companies across the globe. They don’t restrict their investments based on a particular country, region, sector, theme, asset class, etc. They are the most diversified mutual funds. Some of these funds include:
- Aditya Birla Sun Life International Equity Fund – B
- DSP Global Allocation Fund FoF
- ICICI Prudential Global Stable Equity Fund FoF
- PGIM India Global Equity Opportunities Fund FoF
Regional mutual funds: These funds invest in companies of specific regions. For example, a mutual fund may invest in companies located either in Europe, BRICS (Brazil, Russia, India, China, and South Africa), or ASEAN (Association of Southeast Asian Countries). Some of these funds include:
- HSBC Global Emerging Markets Fund
- Edelweiss Europe Dynamic Equity Offshore Fund FoF
- Franklin Asian Equity Fund
- Edelweiss ASEAN Equity Offshore Fund FoF
Country-specific mutual funds: These funds invest in companies of a specific country. For example, a mutual fund may invest in companies located in the United States (US), China, Brazil, etc. Some of these funds include:
- Nippon India Japan Equity Fund
- ICICI Prudential US Bluechip Equity Fund
- Edelweiss Greater China Equity Offshore Fund FoF
- HSBC Brazil Fund FoF
Sector mutual funds: These funds invest in companies belonging to a specific sector. For example, a mutual fund may invest in companies belonging to information technology (IT), commodities, real estate, etc. Some of these funds include:
- Edelweiss US Technology Equity Fund FoF
- Aditya Birla Sun Life Global Real Estate Fund FoF
- DSP World Agriculture Fund FoF
- Aditya Birla Sun Life Commodities Equities Fund – Global Agri Plan
Thematic mutual funds: These funds invest in companies belonging to a specific theme. For example, a mutual fund may invest in stocks belonging to the innovation theme or climate change theme. Some of these mutual funds include:
- DSP World Energy Fund
- Axis Global Innovation Fund FoF
- HSBC Global Equity Climate Change FoF
- Invesco India – Invesco Global Consumer Trends FoF
Who should invest in International Mutual Funds?
For a variety of reasons, investors have always been drawn to international funds. – One is diversity. Secondly, the economic cycle differs per country, and investing in multiple economies at the same time provides less loss and possibly smoother returns. Thirdly, exposure to overseas marketplaces will only add to your knowledge and experience. Simply put, international funds (equity and/or debt funds) invest in the worldwide market.
They are not, however, suitable for passive investors because they necessitate rigorous and ongoing market research. Before investing, investors should be certain of their short- and long-term investment objectives. Examine their track record; they can assist you in selecting a fund that meets your needs.
Advantages of International Funds
Let's now look through some of the advantages of investing in international funds.
- Geographic Diversification: One country can never constantly lead the charts, therefore even if you don't have a shot this year, there is a possibility next year. Most countries have an economic cycle at the macroeconomic level. As a result, diversifying your investments across countries allows you to experience lesser peaks and valleys in your profits.
- Can aid in the creation of a cost-effective portfolio: You can use your foreign currency exposure to fund important financial ambitions (such as your child's wedding or college education). Indian shares are also not cheap in terms of overall value. As a result, a well-chosen International Fund can help to balance things out.
- Diversification of your portfolio: A portfolio of investments has a mix of high, medium, and low-risk investments. As a result, if the home country's market is at a low, the one abroad can compensate.
- Expert Management and International Exposure: You may lack sufficient knowledge of the economy and industry of the other country. A qualified mediator can be extremely beneficial in this situation. As a result, even if you are unfamiliar with the global market, you can obtain exposure to it.
Factors to consider before investing in International Mutual Funds
If you want to use international money to your benefit, have comprehensive research done before investing and throughout the period of the investment. The following are the top five starting tips:
- Follow the fundamentals of mutual fund investment.
- Read the offer paper attentively and ask questions if you have any questions (if any)
- Understand the fund's investment aim and the risks it plans to take. Determine whether these elements are in line with your investment strategy.
- Do some research on region-specific funds and determine whether investing in those areas for the next few years is feasible.
How to invest in international mutual funds?
A lot of AMCs in India offer international mutual funds. For an individual investor, the process of investing in these funds remains the same as for domestic funds. The money collected from investors is invested in two ways. The fund manager can invest in shares of foreign companies directly or invest in the units of another international mutual fund based in a foreign country.
Usually, fund managers in India take the latter route. They have a tie-up with an international mutual fund (underlying fund) in a foreign country. The money collected from domestic investors in India is invested in the units of the underlying fund. This concept is referred to as Fund of Fund (FoF).
For example, Edelweiss MF offers Edelweiss Europe Dynamic Equity Off-shore Fund to investors in India. Edelweiss MF has tied up with JP Morgan Funds – Europe Dynamic Fund (underlying fund). The money collected from domestic investors in India is invested in the units of JP Morgan Funds – Europe Dynamic Fund (underlying fund).
Similarly, Axis MF offers Axis Global Equity Alpha Fund of Fund to investors in India. Axis MF has tied up with Schroders International Selection Fund Global Equity Alpha (underlying fund). The money collected from domestic investors in India is invested in the units of Selection Fund Global Equity Alpha (underlying fund).
Returns given by international mutual funds
In the above sections, we have understood the types of international mutual funds. Let us see the kind of returns that some of these funds have delivered.
|Scheme name||Returns (%)|
|1 year||3 years||5 years|
|Nippon India US Equity Opportunities Fund||30.52||20.71||19.50|
|ICICI Prudential US Bluechip Equity Fund||34.05||21.10||18.36|
|Aditya Birla Sun Life International Equity Fund - Plan A||22.53||13.49||13.59|
|Franklin Asian Equity Fund||18.75||11.87||12.81|
|Nippon India Japan Equity Fund||21.39||10.90||10.61|
|Aditya Birla Sun Life Commodities Equities Fund - Global Agri Plan||45.77||8.99||7.42|
Table: Performance of international mutual funds | (Source: https://www.mutualfundindia.com/)
Note: The returns are as of 22nd July 2021. The one-year returns are absolute, and the three and five-year returns are annualised. The funds are ranked based on five-year returns.
International mutual funds should be a part of your asset allocation
As part of appropriate asset allocation, you should allocate a certain portion of your investments to equity. From the equity portion, you should allocate a certain portion to international equity mutual funds. With international equity mutual funds, you can diversify beyond India to reduce country-specific risk. Rupee depreciation against the US Dollar enhances your returns. You would have used the products and services of most FAANG companies. With international equity mutual funds, you have an opportunity to become an investor in these companies.
To plan and systematically invest in international funds for achieving your financial goals, you can partner with Glide Invest. You will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- Hand holding you till your financial goals are achieved
Q1: What are International Mutual Funds and How Do They Work?
A1: International mutual funds invest in the same way as domestic mutual funds. Investors are granted units of the funds in exchange for their money being invested in rupees. The money is invested by the fund manager in equities of companies that are listed on marketplaces outside of India. The fund manager now has two options for investing your money in foreign enterprises.
- By buying stocks directly and putting together a portfolio
- Alternatively, you can put your money into a well-established global fund with a pre-designed portfolio of international firm stocks.
Q2: How can I invest in places outside India?
A2: Investors with little knowledge of foreign markets but a desire to invest in foreign markets and firms can do so through international mutual funds. The fund manager will assist you in gaining exposure to some of the world's greatest markets and stocks. All you have to do now is put your money into the market.
Q3: Is it wise to invest in international mutual funds?
A3: International mutual funds allow investors with limited knowledge of foreign markets but a desire to invest in overseas markets and enterprises to do so. The fund manager will help you acquire access to some of the world's most prestigious marketplaces and stocks. Now it's just a matter of putting your money into the market.
Q4: What percentage of my portfolio should I put into international funds?
A4: By allowing you to engage in a range of worldwide markets, international funds provide geographic diversification. It gives you the opportunity to invest in some of the world's most successful businesses. Finally, a rise in the value of your currency allows you to make more money. Because they provide so many advantages, international mutual funds are an outstanding investing alternative.
Q5: What are the tax implications of investing in overseas mutual funds?
A5: Although international mutual funds are taxed similarly to domestic debt or fixed income funds, they provide access to global stocks in India. Short-term investments are those that last less than three years, and long-term investments are those that last more than three years. These investments' short-term capital gains are taxed according to your tax rate. Long-term capital gains, on the other hand, are taxed at a rate of 20% after taking into account the indexation benefit.