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Home Articles International Funds: How To Diversify Your Investment Portfolio?

International Funds: How To Diversify Your Investment Portfolio?

IndianMoney.com Research Team | Updated On Thursday, September 06,2018, 12:52 PM

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International Funds: How To Diversify Your Investment Portfolio?

 

 

 

In this era of Globalization and Liberalization, investors cannot stay isolated. You are exposed to an increasing number of International products. You use foreign products and services like iPhone, Google Search Engine, Facebook, Amazon in day-to-day life.  

        

It’s time to get accustomed to International Investing. Investors have two options of investing in an international market:

 

  • Invest on their own: The Reserve Bank of India permits Indian residents to invest up to $2,50,000 a year.
  • International Funds: International Funds are Indian mutual fund schemes which invest in foreign stocks like Facebook and Amazon.

 

Want to know more on Investment Planning? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.

 

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International Funds: How To Diversify Your Investment Portfolio?

 

It’s best to start investing in International Mutual Funds or International Funds.  Investors can enjoy the benefits of geographical diversification. The advantages are an investor can achieve growth (in high-growth markets) and mitigate the risk of focusing only on domestic markets.

 

1. International Funds:

 

International funds are a type of mutual funds. International Funds mainly invest in International markets. By investing in stocks of foreign companies, these funds allow investors to benefit from international growth. International Funds give a global exposure to your investment portfolio and boost returns.

Investing in International Funds is a great way to diversify an investment portfolio. These investments should be based on an investment objective.  Investing just to earn higher returns may not be a good idea. International funds involve international and political risks. A risk-aggressive investor can invest 10-15% of their portfolio in International Funds.

 

2. Who should invest in International Funds?

 

  • Investors looking for an exposure to global companies like Google, Microsoft, Amazon and so on in their portfolio.
  • If future expenses like children’s education (you plan to send children abroad for higher education), would be incurred in International currency. These investments act as a hedge against currency fluctuations.
  • If you plan to relocate to an international location in the future.
  • If you wish to enjoy greater diversification.

 

3. Performance of International Funds:

 

The performance of international funds depends on two factors:

 

  1. Performance of the particular geographical markets
  2. Currency rate movements

 

For investors who wish to invest in equity, it is good to evaluate 3-5 year returns. US based funds have given 10-11% annual returns. China based funds have given 14-16% annual returns over 3 and 5 year periods.

Japan, Brazil and European based funds have underperformed and given returns as low as 2-6%.

 

SEE ALSO: How To Invest In Mutual Funds For 2018-19?

 

4. Choice of regions and themes to invest:

 

Indian investors wishing to invest in International Funds should invest in regions with lower correlation to Indian markets. This is good if you want to invest in International Funds for diversification. Therefore, avoid investing in BRICS (Brazil, Russia, India, China, South Africa), as they are more correlated to Indian markets. Instead, invest in not so correlated international markets like the US.

Despite being a part of BRICS, China is also an attractive economy given its companies are increasingly turning global. China also has a strong domestic consumption market.

International Funds mostly invest in the US as it has consistently performed well. Also, sustained economic improvement and the growth of corporate earnings have contributed to resilience.  Investors can also benefit from the falling rupee. This increases fund returns.

International thematic funds are also an attractive investment option given rising global commodity prices.

 

5. Risks:

 

1. Currency risk: The biggest risk International Funds are exposed to is currency risk. A depreciating rupee benefits investors. Despite International Funds making gains in international markets, your returns would suffer if the rupee value increases against the currency in which the international fund is invested.

 

2. Political and economic risks: The slightest change in the political realm of a country impacts the value of your investments.

 

3. Weak understanding of International equity markets: If fund managers don’t have a good understanding on international equity markets, your investments are at risk. Most of the International Funds are small in asset size, typically less than Rs 100 Crores.

 

6. Taxation:

 

For tax purposes, an International Fund qualifies as an Equity Mutual Fund if it has at least 65% exposure to Indian equities. As International Funds invest in international stocks, they don’t qualify as Equity Mutual Funds.

Gains on sale of International Funds are taxed just like a Debt Mutual Fund.

  • Gains on sale of International Funds within 3 years of investment are taxed as per your income tax slab.
  • Gains on sale of International Funds after 3 years are taxed at 20% with indexation.

 

International Mutual Funds attract 25% Dividend Distribution Tax (DDT) + 12% surcharge + 4% cess.

 

Takeaway:

 

  • International Funds are a great way to diversify an investment portfolio.
  • International Funds are easier to gain access to foreign markets.
  • Experts recommend a 15% to 25% exposure to international markets.

 

Be Wise, Get Rich. 

 

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IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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