A beginner’s guide to investing in international MFs

There are broadly two ways; you could directly buy shares listed on foreign stock exchanges or you could invest in mutual funds (MFs) that invest in such stocks. Taking the MF route is easier, as directly buying shares requires you to open bank, demat and brokerage accounts abroad, remit funds into your foreign account, study the markets and individual stocks, understand currency issues, keep track of political and other developments, and so on.

What are international mutual fund schemes?

These are feeder funds (in simple words, fund of funds) offered to Indian investors. These schemes invest your money in schemes abroad. Global funds invest in stocks of companies listed abroad such as Apple, Google, Microsoft, Facebook and Netflix.

Some foreign funds invest directly in stocks abroad. A few others are passively-managed and they invest your entire corpus in indices such as Nasdaq 100 and S&P 500.

International funds can also be categorized in terms of the geographies/markets or sectors they invest in. While some funds invest in developed economies such as the US and Japan, others invest in emerging markets; some funds invest across geographies or markets. Most, though, prefer to invest in international equities and not in debt.

Why should you invest in international funds?

First, you get diversification. Every economy has a different growth cycle; while some economies may be going through a downturn, others could be on an upswing. By investing across economies at different growth cycles, the growth cycle of one economy will help boost the quality of your portfolio and protect you from the downturn of another economy; it also helps you capitalize on opportunities in the growth economy. It also gives you a chance to invest in global companies that aren’t listed in Indian stock markets.

Second, it gives you the benefits of currency depreciation. If the Rupee depreciates against the foreign currency, you get more bang for your buck. This helps in planning for your financial goals such as a foreign education for your children, or relocating abroad. Investing in such funds at an advanced stage helps protect your corpus against Rupee depreciation. The Indian Rupee (INR) depreciated against the US dollar significantly. From around Rs 46 in mid-2010, it has depreciated to Rs 75.95 in May 2020.

On the flipside, if the INR appreciates, investors will receive less if they redeem at that point.

How to choose international funds?

It’s advisable to invest in developed countries that are performing well and have a lower correlation to emerging markets like India. Since India is an emerging market, it does not make sense to invest in another emerging market. The US is currently on a growth cycle and the country’s markets have listed the best performing global companies such as Amazon, Facebook, Netflix, etc. making it one of the best markets to invest in. This is evident from the rise in the Nasdaq 100 index which is composed of prominent global companies such as Facebook, Microsoft, Amazon and Alphabet.

The Nasdaq 100 has delivered an attractive 10-year CAGR return of about 18 per cent. As against this, the BSE Dollex 30 has delivered CAGR returns of a mere 0.03 per cent over the same period. The BSE Dollex 30 index is a like-to-like comparison with the NASDAQ since its constituents are the same 30 companies that form the BSE Sensex, but their prices are in USD terms. With the USD strengthening against the INR, even while the companies have performed well, the strengthening dollar (and lower INR value) has resulted in returns falling to nearly zero over the 10-year period.

Invest at least 10-15 per cent of your portfolio in international funds.

 Are Index funds and ETFs preferred routes to investing internationally?

It’s preferable to invest in international funds that, in turn, invest in a foreign stock market indices such as the Nasdaq 100, S&P 500, etc. than investing in actively managed international funds. Investing in the index not only brings top performing companies into your investment portfolio (since such companies usually form part of such foreign indices), it also reduces the risk of investing errors that could result from active fund management.

What are the tax implications?

International funds are taxed as debt funds. If you stay invested for less than three years, the capital gains are taxed at the tax slab applicable to your total income. If you stay invested for more than three years, capital gains are taxed at 20 per cent with indexation.

(The writer is the founder & Chief Financial Planner at MoNey MinTing ManTra)