Investing in international mutual funds? Here’s what you must know

The best way to invest in foreign stocks and equities if you’re just starting out is through International Mutual Fund schemes that invest in global equities. These are the 5 things you need to keep in mind before investing in international mutual funds.

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International Mutual Funds can be categorized in 3 ways

A. Mode of Investment
Funds that invest directly: These are funds which are directly handled by the local fund manager. Instead of relying on a fund manager who lives offshore, your local fund manager makes sure to look after your portfolio themselves.

Funds that invest indirectly: These funds are known either as feeder funds or fund of funds— because they pool in money from local investors and then transfer the corpus to the parent fund which is managed offshore—that invest the investor’s money in a basket of offshore funds.

B. Region of Investment
Region-specific funds: Under this comes funds that invest either in a specific country like US/UK/China or in a specific region like South-East Asia.

Funds that invest across the globe: There also global funds that don’t stick to one particular region/ country and invest in companies across the world as well.

C. Theme/Sector of Investment
These funds invest in specific themes like Agriculture or commodities, where there are gold funds etc… or there are funds that invest in particular sectors like the tech sector or retail sector.

Avoid emerging market funds

When you’re starting out, it is always advisable to invest in funds developed countries that are performing well. India may be the fifth-largest economy, but our market cap is a little over 2 trillion dollars while value of the US stock market is over 90 trillion dollars. That’s roughly 43 times the opportunity. So when you do invest, avoid emerging market funds.

Invest in foreign stock market indices

While there are a plethora of international mutual funds to choose from, if you’re a first time investor then its safest to put your money into funds that, in turn, invest in foreign stock market indices such as the Nasdaq 100, S&P 500 etc. Nasdaq100 has given 10-years CAGR returns of over 18% whereas Indian stock indices have given returns of less than 1%. Investing in the index not only brings those big companies which you always wanted to invest in into your investment portfolio as such companies usually form part of such foreign indices, it also reduces the risk of investing errors that could result from active fund management.

Leverage currency depreciation

Investing in international MFs comes with certain intrinsic advantages. 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 gives you the benefits of leveraging currency depreciation. The rupee has been consistently depreciating at about 6% against the dollar over the last 3 decades. Investing in US-based funds can help you take advantage of the currency price difference as well.

Taxation

Investments into international MFs are treated like investments into any other domestic fund, there are no additional regulations as the case with investing into stocks. But you will have to pay long-term capital gains tax.