So, you’ve decided to expand your mutual fund portfolio to international mutual funds! Great decision. But before we dive into the pool of potential profits and risks, let’s first understand what international mutual funds are. International mutual funds invest in companies outside of India, allowing you to diversify your investments and gain exposure to global markets. They are essential because they offer a chance to invest in top-performing companies.
However, before investing, there are a few factors you need to keep in mind. Exchange rate risk, market risk, political risk, and regulatory risks need to be considered before putting your money into international mutual funds. There are different types of international mutual funds available in India, such as global funds, regional funds, and country-specific funds. Each fund has its unique investment objective and strategy. Now that you have a basic understanding let’s dive deeper.
What are International Mutual Funds?
Diversification of a portfolio is a big win with International mutual funds. With exposure to global markets, your portfolio is bound to be diversified, and you can easily reduce your investment risks. Plus, with country-specific funds or funds that invest in top-performing companies, you can gain access to high-growth companies you would otherwise not have access to. How awesome is that? But, what about currency fluctuations? That’s where international mutual funds cover you. The exposure to different currencies helps you balance and hedge your portfolio against undue risks. Sure, market risks always pose a threat. That’s why it is essential to research and invest in the right fund that matches your investment goals and financial planning.
Risks Associated with International Mutual Funds
Let’s get to the downside of investing in International Mutual Funds. There are risks associated but we’ll make sure you know how to manage them.
- Currency Exchange Rate Risk: International mutual funds invest in assets denominated in different currencies. Changes in currency exchange rates can impact the fund’s returns.
- Geopolitical Risk: Factors such as changes in government policies, political instability, trade disputes, economic sanctions, and geopolitical conflicts can have a profound effect on the performance of international mutual funds. These events can cause market disruptions, volatility, and potentially negative consequences for investments in affected regions.
- Regulatory Risk: Regulatory risk arises from changes in regulations and legal frameworks in different countries. Each country has its own set of rules governing financial markets, investments, and investor protection. Changes in regulations, tax policies, or legal systems can impact the operations, profitability, and investment opportunities of international mutual funds.
- Market Volatility: International markets can exhibit higher volatility compared to domestic markets. Economic conditions, political events, investor sentiment, and market-specific factors can contribute to increased volatility. Market volatility can impact the performance of international mutual funds, leading to fluctuations in their net asset value (NAV).
- Management and Performance Risk: The performance of international mutual funds is influenced by the decisions and expertise of the fund manager or management team. The skill and experience of the manager in navigating international markets, analyzing opportunities, and managing risks are crucial factors.
Factors to be considered before investing
- Fund Strategy and Focus: Understand the fund’s investment strategy and focus. Some international mutual funds may focus on specific regions, countries, sectors, or themes. Evaluate whether the fund’s strategy matches your investment preferences and aligns with your views on global markets.
- Fund Performance and Track Record: Review the historical performance of the fund over different periods. Compare the fund’s performance to relevant benchmarks and peer group funds. However, remember that past performance does not guarantee future results.
- Fund Expenses: Consider the fees and expenses associated with the fund. Review the expense ratio, which includes management fees, administrative costs, and other charges. Lower expense ratios can have a positive impact on investment returns over the long term.
- Fund Size and Liquidity: Evaluate the size of the fund and its liquidity. Larger funds may offer more stability and resources, while smaller funds might be more nimble. Assess the fund’s liquidity, ensuring it has sufficient assets and trading volume to facilitate buying or selling shares without significant price impact.
- Fund Holdings and Diversification: Analyze the fund’s holdings and diversification. Look for well-diversified funds that invest across different regions, industries, and market caps. Diversification helps mitigate specific risks associated with individual countries or sectors.
Taxation on International Mutual Funds
- Short-term capital gains: If you redeem your international fund investment within three years, it is termed a short-term capital gain. These gains or profits are added to your income and are taxed according to the tax bracket you fall in.
- Marginal Tax Slab: And, if you redeem your mutual fund after three or more years, then your returns are taxed on based on your income tax slab.
- Dividends: Dividends from international mutual funds are taxed as per the dividend distribution tax (DDT) rules. This means that dividends are taxed at a flat rate of 15%.
- Foreign tax credit: If you have to pay taxes on your international mutual fund investment in the country where the fund is domiciled, you may be able to claim a foreign tax credit in India. This will reduce your tax liability in India.
Previously, international mutual funds also gained indexation benefits.
Comparative View on Some Funds**
|Fund Name||AMC||Expense Ratio||AUM (in ₹ crores)||3Y CAGR||Benchmark Index|
|Nippon India US Equity Opportunities Fund||Nippon India||1.28%||₹ 564.40||10.80%||S&P 500 Index|
|Motilal Oswal S&P 500 Index Fund||Motilal Oswal||0.55%||₹ 2708.28||15.13%||MSCI All-Country World Index|
|Franklin Asian Equity Fund||Franklin Templeton||1.29%||₹ 2559.67||2.41%||MSCI AC Asia ex Japan Index|
**Conduct your research
Congratulations! If you have made it to the end of this guide, you are now equipped with everything you need to know about international mutual funds. From what they are and why they are important to the benefits and risks associated with investing in them, we have covered it all. We have also provided you with information on how to invest in international mutual funds in India, the tax implications, and frequently asked questions. Now go forth and invest wisely, contact your mutual fund advisor, but remember, always do your research before making any investment decisions. Happy investing!