Investors looking for geographical diversification in their portfolio can consider investing in international markets through mutual funds.
Termed as international funds, they invest in equities of a region or country, or fixed income securities.
Of the international funds available to investors in India, there are country-specific, region-specific and thematic funds. For example, there are funds that invest in the US, Brazil or Europe. Apart from this, there are theme-based funds investing in sectors such as consumption, energy and real estate. As a resident Indian investor, you have to invest only in Indian rupees. Like any other mutual fund, you can select the fund, write a cheque and submit the application form to a fund house. You may even invest online.
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 in the form of a fund of funds.
There are many stocks or businesses which are not available in the listed space in India. For example, cola companies. You can be part of the growth stories of such companies through international funds that also help you diversify across geographies. For example, when the Indian economy isn’t doing well, global markets may give you higher return.
In addition to the normal risks of investing in stocks, international funds also come with currency risks. This could happen due to fluctuations in the value of other markets’ currency against the Indian rupee. While you will invest in rupee, the fund house will have to take exposure to international stocks in various currencies. Therefore, investors have to be prepared for currency risks because any fluctuation will directly impact the NAV of the fund. For example, if the rupee depreciates against the dollar, you will get more rupees for every dollar invested, and your NAV could be higher. On the other hand, if the rupee appreciates against the dollar, you get fewer rupees for every dollar invested.
From the taxation point of view, international funds are treated on a par with debt mutual funds. For a holding period of less than three years, an investor is required to pay short-term capital gains tax on the profits as per his tax slab. When it is held for more than three years, the investor will get indexation benefit as the profit is treated as long-term capital gains. Post indexation, the gain is taxed at 20%.