personal finance

Diversification through international funds

Usually financial advisors suggest using the mutual fund route to invest in international markets for geographical diversification. Let us explore on how to go about it.

Why invest in markets outside India?

Diversification is the practice of spreading your investments around so that your exposure to any one type of asset is limited. Diversifying investments Globally helps in getting exposure to different asset classes of different countries. The presence of many global businesses’ in India such as Apple, Amazon, General Motors, Microsoft, Facebook and Alphabet, may interest investors to take exposure in these businesses.

The purpose of diversification of portfolio is to invest in assets that have low correlation with your existing assets. By Investing in international funds, one gets an option to take exposure in markets that don’t move in sync with Indian markets. This will help one mitigate the impact of downs and ups in the Indian markets, by spreading investments in global markets.

How can one use mutual funds to invest in international markets?
When investing in international funds from India; you do so with the local currency and not in foreign currency. Funds could be broadly categorised specific to exposure in a country, region or theme. For instance, there are funds that invest in the US, Europe, Asia etc and in themes such as energy, commodities, real estate and others. Adding a fund which has exposure to other country’s equities will aid in geographical diversification.

How do these funds invest?

Some funds directly invest in overseas securities whereas most funds use the feeder route or Fund of Fund route. Fund of Funds acts as a master fund and invests in multiple funds to achieve its investment objective while Feeder funds are funds which invests in a single master fund.

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What are the risks involved when investing in international funds?

As much as mutual funds offer the convenience of investing, there are inherent risks involved when investing in them. However, when investing in international funds, you need to keep in mind certain risks specific to investments in them. At the top of the risk chart is currency risk. Any fluctuation in the value of the rupee will have an impact on the NAV of the fund. Any appreciation in the rupee against the dollar and the NAV is likely to take a hit and vice-versa.

How are gains from investments in international funds taxed?

International funds are taxed the same way as debt funds are taxed. Long-term or short-term capital gains tax is applicable depending on the holding period of investments in these funds. Short term capital gains (STCG) are taxable if the units have been held for less than 36 months. These are taxed at the income tax slab rates. Long term capital gains (LTCG) on debt mutual funds are taxed at 20% with indexation or 10% without indexation.


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