All you need to know about international funds and diversification

Why is there a need to add international funds to portfolio?

One needs to diversify equity mutual fund portfolios to reduce risks. At times, the Indian economy will go through rough patches and global markets will perform well and vice versa. Global markets have low correlation with Indian markets and hence help reduce risk. Also, many large companies in areas like automobile, technology, and the internet are based in markets like the US and Europe. Participation through international funds gives you a chance to own these companies.

Which international funds are available to indian investors?

There are a number of international offerings available to Indian investors. These could be country specific, region specific and theme-focused technology funds. As a resident Indian investor, you can invest in Indian rupees. Like any other mutual fund, you can select the fund, write a cheque in rupees or go online and invest.

How do international funds invest?

Funds on offer to Indian investors invest in international markets either directly or have the option to invest in other funds in those markets. The latter is called a feeder route — typically in the form of a fund of fund.

How are international funds taxed?

From a taxation perspective, international funds are treated on par with debt mutual funds. For a holding period of less than three years, the investor is required to pay short-term capital gains tax on the profits at his/her tax slab. When the fund is held for more than three years, the investor will get indexation benefit as the profit is treated as long-term capital gain. Post indexation, the gain is taxed at 20%.

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Any additional risk one has to worry about?

In addition to the normal risks of investing in stocks, international funds carry currency risks. This could arise due to fluctuations in the value of other markets’ currency against the Indian rupee. While investors will invest with rupee, the fund house will have to take exposure to stocks in different currencies. Due to this, investors have to be prepared for currency risk, due to fluctuations. For example, if the rupee depreciates against the dollar, you will get more rupees for every dollar invested in that region and your NAV could be higher. On the contrary, if the rupee appreciated against the dollar, then you get fewer rupees for every dollar invested there and your NAV will take a hit to that extent.



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