International Mutual Funds

Investment in domestic companies is done through equity mutual funds available to you like large cap, mid cap, small cap, multi cap, and more. Similarly, if investors want to invest in companies not listed in India, one option available to them is International Mutual Funds.

Investing in international mutual funds is the same as investing in any other equity mutual fund. The money is invested in rupees and in return units of the funds are allocated to investors. The fund manager takes the money and invests them in the stocks of companies that are listed on exchanges outside of India. Now, there are two ways in which the fund manager invests your money in foreign stocks.

• By directly purchasing stocks and building your portfolio

• Or, by investing in an existing global fund that already has a pre-designed portfolio consisting of stocks of foreign companies.

However, whichever way they pick, they are administered by Indian mutual fund companies. Like all other mutual funds, they are regulated by the Securities Exchange Board of India (SEBI).

• Thematic International Funds:

  These are like domestic thematic mutual funds wherein the fund follows a theme-based investing approach. For example, a domestic thematic fund that has infrastructure as its theme will invest in the stocks of cement, power, and steel companies. Similarly, a thematic international fund will invest in the stocks of foreign companies that belong to the concerned theme.

• Region or Country-Specific Funds:

  As the name suggests, these funds invest in the stock markets of a specific region or a specific country. For instance, an international fund that invests only in US stock markets or a fund aimed towards investing only in Asian markets. The main motive is to capitalize on the opportunities generated by these markets in order to reap good returns.

• Global Markets:

  They are contrary to the region or country-specific funds. Instead of catering to a specific country or particular region, these funds invest globally. They have a portfolio consisting of stocks of companies from across the world. This means they leverage opportunities in different markets at the same time The main aim here is diversification. Even if one of the markets does not perform well, investments in other markets would save the day for the investor.

• Geographical Diversification:

  There are many advantages of investing in international funds. But, diversification is the biggest advantage offered by international funds. Different economies perform differently in a given period of time. There may be instances when the Indian economy is struggling, but the US, UK, Chinese or Japanese economy is booming like never before. So, international funds help you leverage the opportunities in these markets while the Indian economy is not able to generate good returns for you. Thus, if you spread out your investment across geographies, you'll get diversification on a global scale.

• Opportunity to Become Owners of Global Market Leaders:

  By investing in international funds, you become owners in some of the biggest businesses in the world like Facebook, Adidas, Apple. You can be owners while being consumers of your favorite brands. Thus, when you invest in these companies through international funds, you get a part in the profit made by these companies.

• Currency Diversification:

  If we look at the recent trend in the rupee with respect to dollars, we see that the value of the rupee has gone downhill only. In 2000, the value of the rupee was Rs. 45 and cut to today, the Indian rupee is trading at Rs. 75. Reasons for this depreciation are many: from political instability to rising inflation levels to weak fiscal policies. You can turn this depreciation in the rupee to your advantage by investing in international funds. When you invest in international funds you get exposure in foreign currency through investing in rupees. Any appreciation in the value of the foreign currency or any depreciation in the home currency will increase your returns.

• Equity Investors with a Well Diversified Domestic Portfolio:

  It is advisable that amateur investors, who are fairly new to mutual fund investments, should not straight away jump into international funds. They are great for investors who already have a well-diversified portfolio of Indian companies. Such investors can further diversify their portfolio and have a chance to fetch good returns, by investing in international funds.

• Looking to Invest in Global Market Leaders:

  There are some global brands that are absolute favorites like Netflix, OnePlus, Apple, Facebook, Vivo, etc. which makes them the market leaders. The only catch is that these market leaders are not listed on Indian stock exchanges. So, if you want to be owners of the brands that you really like, you can do so by investing in international funds. You'll also have a share in the profits these companies make.

• Looking to Leverage Opportunities in Different Markets:

  Different markets perform differently at a given period of time. There have been instances when Indian markets were doing just fine, and on the other hand, the US markets were performing exceptionally well. For instance, in 2016, when the BSE Sensex was up by just 3.91%, the Dow Jones Industrial Average Index (US stock market index) was up by 15.24%. So, by investing in international funds, investors can capitalize on other markets when the domestic markets are giving decent returns or even when they are struggling.

• Investors with a Long Term Horizon:

  If you're an investor who is looking to mobilize a huge corpus for fulfilling your long term goals like retirement, child's education, etc. international funds can help you get there. A long term investment horizon protects you from the volatility of equity markets. It also helps you reap the benefits of compounding. In order to avail the benefits offered by international funds, you should have an investment horizon of at least 5 years.

• Know Where the Fund Invests in:

  Different international funds have different investment strategies based on which their fund managers construct their portfolio. There are funds whose portfolio consists of both Indian equities as well as foreign equities. On the other hand, there are funds that are focussed on investing in stocks of emerging markets only. So there are a variety of international funds that vary in terms of their portfolio. Thus, you should know where your fund invests in and it should be in line with your investment objective.

• Investment Risk:

  Even though there are a host of benefits that international funds offer, you should also know some of the risks associated with investing in mutual funds. The following are the two key risks of investing in international mutual funds.

• Economic & Political Risk: Two important factors that affect the Indian domestic markets are economic and political factors. So any political unrest or economic turmoil would take a toll on your domestic investments. As international funds invest in other countries or regions, the change in the economic or political condition can negatively impact your investment in international funds.

• Currency Risk: Based on the type of international fund, your investment in rupees is converted into the currency based on the fund's investment approach. So, if a fund follows a country-specific approach where it invests in the say US markets, your investment in rupees will be converted in US dollars (USD). If the US dollar appreciates in respect to the Indian rupee, then it's a win for you. But, if it depreciates with respect to the rupee, then it'll negatively impact your portfolio.

• Expense Ratio: Before investing in international funds, you should know the expenses that scrape into your returns. The Asset Management Companies charges you a fee called an expense ratio. This is basically the charge to cover the fund's administrative and operating expenses like the fund manager's salary. It is charged on an annual basis.

• Short Term Capital Gain (STCG):

  If you redeem your international fund investment within three years, then it is termed as Short Term Capital Gains. These gains or profits are added to your income and are taxed according to the tax bracket you fall in.

• Long Term Capital Gain (LTCG):

  And, if you invest for three or more than three years, then your returns are classified as Long Term Capital Gain (LTCG). Such gains are taxed at the rate of 20% percent after indexation.

Let's look at some of the top-performing mutual funds helming the international fund category. The performance is based on the basis of returns provided by the fund in the last 3 and 5 years.