International Funds are becoming the flavour of the day. Are they for you?
For those keeping an eye on the mutual fund space, you would have suddenly found a lot of discussion on the subject of need for Indians to invest in other markets of the world. And this discussion is through various webinars, news articles, advertisements and social media communications. Let us see what are International funds, how do they work, and are they for you?
Why this sudden interest in global markets?
As the equity markets continue to hit new highs every week, mutual fund houses are looking for ways to diversify investment risks for Indian investors. One of the strategies the industry is looking at is to invest in global markets, ie stock markets outside India.
Global equities, as an asset class, help investors diversify, and thus de-risk, their exposure concentrated due to investing only in one country, India.
When one invests in the stock markets of only one country, the political, economic and financial happenings of that country directly and fully affect the invested portfolio.
Different economies and markets do not move in tandem with each other, except during global phenomenon like the Covid-19 or meltdowns of 2008. International funds provide an opportunity to invest in other economies that are performing well at a particular point in time. The good returns from the foreign markets support the overall return from Indian portfolio in periods when the primary Indian market is not doing well.
Also, Indians do not get access to the top and best performing companies of the world if their stock investments are confined to Indian stock markets whether as direct stocks or through mutual funds. Hence, the case for investments of Indians to be diversified for international exposure provided the risks are well understood.
The Global GDP is approximately $83 trillion. India is around $2.5 trillion only (3%) while the US GDP is around $21 trillion (25%). So, in the global scheme of things, Indian equity exposure is like exposure to a Small cap stock while US equity is like a Large cap stock. Same is the case when we look at other economies with large stock markets like China, Japan, Hong Kong, Singapore and Europe.
How can investment be done in international stocks and stock markets?
An individual who wishes to have an exposure in international stocks has three ways of doing it:
- Directly invest in equities abroad by using the liberalised remittance scheme (LRS) of the RBI. As per this scheme, resident Indians (individuals) can transfer up to USD 250,000 in a financial year for various purposes including investment in foreign markets.
- Invest in an Indian fund which invests in a fund abroad which invests in foreign stock markets. Such an Indian fund is called a Fund-of-Funds (FoF).
- Invest in an Indian multi-cap or Flexi-cap fund which also invests in international stocks, such as Parag Parikh Flexicap fund.
The first route of directly investing in foreign equity could be difficult, or maybe even dangerous, for most investors due to lack of domain knowledge of foreign equity. Hence Indian International Mutual funds, whether investing directly in equity or going through the route of investing in a foreign fund, is the best way to go ahead for this purpose. You also get the flexibility of investing through the route of bulk and/or SIP rote in such funds like any other mutual fund scheme.
The international funds could invest in different ways:
- Be country-specific, ie, investing in the stock markets of only one country eg, US, Brazil, Japan, and China.
- Be Region-specific like investing in Europe, Asia or even emerging markets.
- Invest in companies abroad based on a particular theme like retail consumption, energy, commodities, and real estate.
Risks of investing in international mutual funds
We see three risks which should be understood before one takes a decision:
- Exchange rate risk: Fluctuations in foreign exchange rates, especially appreciation in the rupee, can adversely impact the returns of international funds.
- Foreign market risk: International funds expose its investors to the political, economic and stock market risks of foreign economies that the fund is investing in. The risk is higher in case of investing in emerging or frontier markets which could be lacking in a proper regulatory framework, market efficiency and liquidity.
- Concentration risk: International funds with concentrated investment portfolios, like investing in one index of a country, or a specific theme like global real estate or agriculture, may suffer from higher risk, lower liquidity and higher return fluctuations.
Taxation of International Funds
International Mutual funds are treated like debt funds in India as far as taxation is concerned.
The gains for a holding period of less than three years are treated as short-term capital gains. They are added to the income of the investors and are taxed at the slab rate. The gains over a holding period of more than three years are treated as long-term gains and are taxed at the concentrated rate of 20% post indexation, making them quite tax-efficient.
What is the current mutual fund activity in this arena?
As more Indians look to invest abroad, MFs are lining up international funds like never before. ABSL, DSP, Edelweiss, Franklin, HSBC, ICICI, Invesco, Kotak, Motilal Oswal, Nippon and PGIM already have many international funds in their kitty.
SBI Mutual Fund has recently announced the launch of SBI International Access – US Equity FoF, an open-ended Fund of Fund scheme that invests in mutual fund scheme/ETFs that further invest in the US markets. Six mutual fund houses are further seeking SEBI’s permission to offer nine international schemes. The fund houses include Mirae Asset, Mahindra Manulife, Nippon India, Kotak Mahindra, HSBC and BNP Paribas.
The competition to take your money abroad is hotting up. Judge for yourself whether you want to be a part of it.