Diversify equity portfolio with international funds


As a part of diversifying your equity portfolio, wealth managers believe investors should diversify geographically using mutual funds. They can do this by investing in feeder funds or international funds which invest in equities of a region or country, or fixed income securities.

Why should an investor use international funds?

We are increasingly opting for international holidays and many children opt for higher education abroad. Hence, it makes sense to diversify geographically. In addition, there are phases when the Indian economy goes through a rough patch, while some international markets may do well and give higher return. Also many large companies in areas like automobiles, technology, internet are based in markets like US and Europe. Participation through international funds gives you a chance to own world-class companies like Apple Inc, Amazon, Mastercard, Visa, Alphabet, Microsoft and Facebook.

What international funds are available to Indian investors?

Many international funds are available to Indian investors. These could be country-specific, region-specific and thematic funds. For example, there funds that invest in the US, Europe, China, Japan or Brazil. Apart from this there are theme based 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, submit the application form to the respective fund house or invest online.

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 way is called a feeder route and is typically in the form of a fund of fund.

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What is the risk of investing in international funds?

In addition to the normal risks of investing in stocks, international funds also 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 international stocks in different currencies. Due to this, investors have to be prepared for currency risk, due to fluctuations This in turn could impact the net asset value (NAV) of the fund. 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.

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 per cent.





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