Invest in International Mutual Funds in 2022 – International Mutual Funds Benefits
Asset allocation requires an investor to invest across various asset classes such as equity, debt, commodities, real estate, etc. Equity as an asset class can be classified into domestic and international equity. This article will explain how to invest in international funds in 2022.
Advantages of international funds
Before we look at the advantages of international funds, let us briefly understand international mutual funds. An international fund invests in securities of companies headquartered and listed on stock exchanges outside the investor’s country of residence.
For example, companies like Netflix, Amazon, etc., are listed on US stock exchanges. For an Indian resident investor, a domestic mutual fund scheme that invests directly or indirectly (through Fund of Fund (FoF)) in the shares of these companies will be classified as an international fund. International mutual funds are also called foreign funds or overseas funds.
The advantages of an international fund include:
Returns: As per the MSCI country indices, in the past decade (2011-2020), the Indian market was the best performer in only two years. The US market was the best performer in 6 years. So, international funds give Indian investors an opportunity to earn superior returns from the US and other international markets.
INR depreciation: The Indian Rupee (INR) has steadily depreciated by an average of 2-3% against the US Dollar every year. The INR depreciation boosts the returns of Indian investors from US markets. For example, if the US markets gave a return of 10% in US Dollar terms in a particular year, and the INR depreciated by 3% in that year, the returns for an Indian investor will be 13% in Indian Rupee terms.
- Diversification: International funds give Indian investors an opportunity to diversify their risk from domestic equity. Historically, international equity markets such as the US have had very little correlation with the Indian equity markets. So, the US markets would have done well when the Indian markets were down in a particular year due to some domestic event such as demonetisation, Union Budget, etc.
Top schemes of international funds
(Direct Plan - Growth Option)
|Franklin India Feeder – Franklin U.S. Opportunities Fund||4,216||11.76%||29.37%||22.44%|
|Edelweiss Greater China Equity Off-shore Fund||1,973||-13.96%||18.27%||19.73%|
|DSP US Flexible Equity Fund||130||40.82%||24.00%||17.56%|
|Sundaram Global Brand Fund||96||19.76%||19.96%||13.47%|
|Edelweiss Emerging Markets Opportunities Equity Offshore Fund||136||-8.49%||13.22%||11.92%|
How do international mutual funds work?
International mutual funds in India work in two ways. They collect money from Indian investors and
- Invest directly in the shares of international companies or
- Invest in the units of another mutual fund (based in a foreign country) who in turn invest directly in the shares of international companies
The second approach is the Fund of Fund (FoF) approach, and most international mutual funds in India take this approach. For example, the Franklin India Feeder – Franklin U.S. Opportunities Fund. In this case, the Franklin India Feeder acts as a feeder. It collects money from Indian investors and invests it in the units of Franklin U.S. Opportunities Fund, which is based in the US. The Franklin U.S. Opportunities Fund invests in the shares of companies listed on the US stock exchanges.
Who should invest in international funds?
The following people should invest in international funds:
- People who want to diversify their equity investments beyond domestic equities
- People who want to benefit from INR depreciation
- People who want exposure to international companies such as FAANG that are not listed on Indian stock exchanges
Taxation of international funds
From a taxation point of view, international mutual funds have the same tax treatment as applicable to debt mutual funds. International funds are taxed as follows:
- Short-term capital gains (STCG) tax: If you sell your international fund units within 36 months of purchase, the gains will be classified as STCG. The STCG will be added to your overall income and taxed as per your income tax slab.
- Long-term capital gains (LTCG) tax: If you sell your international fund units after 36 months of purchase, the gains will be classified as LTCG. The LTCG will be taxed at 20% after indexation benefit or 10% without indexation benefit.
Advantages of investing in international funds through Glide Invest
When you invest through Glide Invest, you will be advised based on your financial goals, age, risk profile, appropriate asset allocation, etc. Accordingly, based on the above parameters, the platform will recommend international funds for investment. Your investments will be reviewed regularly, and Glide Invest will handhold you till your financial goals are achieved.
Steps to invest in international funds through Glide Invest
While investing through the Glide Invest App, you will have to take the following steps:
- Specify your financial goal, for example, retirement planning
- The amount you wish to accumulate for the financial goal
- The number of years in which you have to achieve the financial goal
- The amount by which you will increase your SIP every year
Based on the above inputs, the platform will recommend three investment portfolios: aggressive, conservative, and balanced. Once you select an investment portfolio, you will see the specific mutual fund schemes recommended for investment. Based on asset allocation, the platform will recommend international funds along with other funds for investment.