The International Mutual Fund has become an attractive investment option for investors in the past few years due to the volatile local markets and an economy going through its ups and downs. These funds are usually preferred by those investors who want to invest in securities beyond domestic stocks and across geographical barriers. This helps the investors to diversify their portfolio beyond the geographical boundary. This geographical diversification will have a positive co-relation to the Indian market unlike asset class diversification.
What is an international fund?
International Mutual Funds are those funds which invest in firms in countries other than the ones they reside. It is also called overseas or foreign funds.
In case of India, it would be funds that invest in the equities of companies that are outside India. Investors usually invest in International Mutual Funds to diversify their portfolio, take advantage of the stock market rallies on major stock exchanges across the world and nullify the impact of stock market volatilities at home.
Difference between International Mutual Fund and Global Fund
International Mutual Funds are funds that invest in foreign markets except for the investor’s country of residence. On the other hand, Global fund invests in foreign markets as well as the investor’s country of residence.
How does International Fund invest?
There are different types of International funds, some funds invest directly in international stocks, and others that invest in international indices such as the Nasdaq or the S&P 500. There are some that act as feeder funds which invest in an identified mutual fund in the international market. Then there is fund of funds that invest in units of international funds.
The most common one is the feeder funds which follows Master-Feeder Structure.
A master-feeder structure is a three-tier structure where investors place their money in the feeder fund which then invests in the master fund. The master fund then invests the money in the market. A feeder fund is based on-shore i.e. in India, whereas, the master fund is based off-shore (in a foreign geography like Luxembourg etc).
A master fund can have multiple feeder funds.
Different types of Foreign Funds
The international fund can be differentiated depending up on the character of the fund and the geography where the fund invests.
Character of the fund
There are three sub-categories under this type of International Mutual Funds
Domestic-International Hybrid: This invests 65% in domestic equities and balance 35% in international equities. In case of the Indian investors, this is a good option because Indian markets are doing rather well presently and returns from these investments become tax free after one year. Funds like Birla Sun life International Equity Fund balance the portfolio between domestic and international investments.
Feeder Investments: This invests through “feeder” route into a particular country or region. Under this mechanism, the fund invests in another international fund, which in turn invests directly in foreign stocks. For example, Franklin Feeder US Opportunities Fund, which invests through this mechanism in the stock of companies listed in the USA.
Thematic Investments: This invests in stocks with an underlying theme based on sector and industry. A simple example of thematic international funds is DSPBR World Agriculture Fund which invests in stocks and companies related to the agricultural sector outside India.
Geography where it invested
Global Funds: Even though they sound synonymous, global funds and international funds are not the same. Funds available across the world, including the home country, are global funds. On the other hand, foreign funds are those available only in other countries.
Regional Funds: If you invest abroad, focusing on a particular geographic region, then it becomes a local fund. Sometimes investors even buy multiple regional funds rather than investing in global funds with presence across nations.
Country Funds: When you invest in a fund only available in one foreign nation, it’s called a country fund. Hence, it becomes easier for you to study their market and decide accordingly.
Global Sector Funds: Giving close attention to a specific sector of the economy in overseas countries, global sector suits investors interested in that sector. Therefore, they mainly aim for exposure to a particular industry.
Advantages of investing in International Mutual Funds
Investment in International Mutual Funds has the following advantages.
Act as a currency hedge: The International Mutual Fund can act as a hedge against the fall in the rupee against dollar, thus minimizing losses owing to the currency depreciation.
Diversification: Adding international fund into your portfolio will give both Geographical diversification as well as Portfolio diversification. At a macroeconomic level, most countries have their economic cycle. Hence, by investing in different countries, you can experience smaller crests and troughs in your returns. These funds will help investors access to those markets that otherwise would be difficult.
Track record: Most underlying stocks that constitute a particular International Mutual Funds scheme have a credible track record and sufficient information about their past performance. This enables the investors to take a sound and informed decision.
Access to foreign blue-chip companies: Some corporate giants like Royal Dutch Shell, Google, Microsoft or cola companies do not have their shares listed on Indian stock exchanges. In such cases the only way of investing in their shares is through international mutual funds or direct investment.
International Exposure under Expert Management: You may not have adequate knowledge about the foreign country’s economy and the industry there. Here, a qualified intermediary can assist. Therefore, you can gain exposure to the global market, even if you are not familiar with it.
Things to be tracked if you are investing in International Funds
The following factors should be considered by an investor while investing in the International Funds.
Economic and political factors: Mutual funds are subject to market risks and this is why their performances are directly linked to the economy they operate in. Foreign Funds suffer from political and economic risks of their region and keeping abreast of such developments is not easy for a foreign retail investor. By the time you make a withdrawal to void losses, it might be too late.
Currency fluctuation: The major risk with International Mutual Funds is the currency fluctuation. You are investing in rupees, but then it is converted into various currencies, depending on the country where it is invested. If the foreign currency in which you have invested falls in value against the rupee, then your returns will suffer and reverse the gains you may have made in the market.
Liquidity crunch: As compared to the mature foreign markets (for example, the US and UK) which absorb the volatility better, the developing economies (for example, Brazil and Indonesia) may not be able to do so. The developing economies may face liquidity crunch making it very difficult for the International Mutual Fund investor to sell investments and exit.
Slowdown in foreign economies: With India being one of the fastest growing economies in the world, investments are giving double digit returns here whereas very few international funds have shown this kind of appreciation. Also, there is a general slowdown in foreign economies, particularly Europe and to some extent the US too. In such a scenario, investing in low growth foreign funds should be considered carefully.
Limited information: The funds specifically fed through feeder mechanism may give very limited information on the underlying stock which is a big risk as the investor cannot gauge the safety of investment in such cases.
Taxation on International funds
The returns on International Mutual Funds for the taxation purpose are treated just like domestic debt funds as they do not qualify for equity funds. The gains from units held for less than three years are added to the person’s income and taxed according to the Income Tax slab. If the holding period is more than three years, the investor can avail the indexation benefit. After indexation, the gain is taxed at 20 per cent.
As the International Fund has geographical risks affecting the fund’s performance, it is recommended only to pro-investors with good understanding of domestic and global markets. If you are a pro-investor or high net worth investor who have already exhausted domestic equity market, then it is advisable to go for a 10% to 15% allocation to Foreign Funds.
However, the investment should be done only if you are ready to undertake currency fluctuation risk, and after cautiously scrutinizing the said scheme as well as political-economic factors of the country.
Dilzer Consultants Pvt Ltd