International funds : Key to achieving geographical diversification

International funds

International funds are those mutual fund schemes which invest in foreign markets

International funds : In the age of globalisation, we cannot be investing in isolation. With liberalisation of the economy, we have been experiencing a very high level of exposure to international products. We have now been aggressively using foreign products and services with ease. I-phones, Google, Facebook, Alibaba and Amazon, etc., are now household names. In the same manner as we are now getting accustomed to such products and services, it is time to look at investing in companies and economies outside India. This is the diversification that we often ignore – geographical diversification.

Geographical diversification is partly for pursuing growth (in a potentially high-growth market, for example) and partly for mitigating the risk of focusing in domestic markets alone. International funds

Now, the question is how to go about it? Either you can invest on your own (RBI now permits Indian residents to invest up-to $250,000 per year) or a simpler option is to invest in mutual funds which invest in equity stocks or funds outside India.

International funds are those mutual fund schemes which invest in foreign markets. These funds can be of different types, like, country-specific international funds, commodity-based international funds or thematic funds. There are funds that invest in the US, Brazil, Europe or Asia. Some international funds are theme-based and invest in sectors such as consumption, energy, real estate and agriculture. International funds

There are two main issues which need to be addressed apart from the regular equity market risks.

  1. Currency fluctuations: Currency risk arises from fluctuation in the value of the other markets’ currency against the Indian rupee. Even though your investment is in rupees, the underlying exposure is in foreign currency assets. Volatility in the currency rate can boost or hurt fund returns. If the foreign currency in which you have invested falls in value against the rupee, then your returns will suffer and reverse the gains you may have made in the market. International funds

2. Taxation: Gains on international funds are taxed just like a debt fund. To qualify as an equity fund for tax purposes, a fund has to hold at least 65 percent in Indian equities. Since these funds invest in international stocks, they do not qualify as equity funds for tax purposes. Dividend Distribution Tax on International mutual funds is 25 percent tax + 12 percent surcharge + 4 percent cess. International funds

International funds are a powerful tool for achieving geographical diversification in your investment portfolio. Here’s why:

  • Reduced Risk: By investing in companies across different countries, you spread your risk. If the stock market crashes in one region, it might be balanced by positive performance in another. International diversification helps mitigate the impact of localized economic downturns or political instability.
  • Exposure to New Opportunities: International funds allow you to tap into the growth potential of emerging markets or invest in established companies in developed economies that you wouldn’t have access to otherwise.
  • Currency Diversification: International funds can provide some currency diversification. As the value of one currency fluctuates, it may be offset by gains in another currency held within the fund. International funds

Types of International Funds:

  • International Equity Funds: These funds invest in stocks of companies located outside your home country. They can focus on developed markets, emerging markets, or a combination of both.
  • Global Funds: These funds invest in a mix of stocks from developed and emerging markets around the world. International funds

Things to Consider When Choosing International Funds:

  • Investment Objective: Align the fund’s focus with your investment goals. Do you want exposure to specific regions or industries?
  • Risk Tolerance: International markets can be more volatile than domestic ones. Choose a fund that aligns with your risk appetite.
  • Fees and Expenses: International funds may have higher expense ratios compared to domestic funds due to factors like currency hedging. International funds

Overall, international funds can be a valuable addition to your portfolio for achieving geographical diversification and potentially boosting returns. However, carefully assess your investment goals and risk tolerance before investing.

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