What are international funds?
International funds are Indian mutual fund companies who invest in to foreign companies. They are commonly called overseas funds or foreign funds. Some international funds invest in the world’s large-cap companies like Apple Inc, Facebook, Coca Cola etc. The global scale and reputation of such companies on a global scale make them an attractive investment option and international funds make it possible for investors to invest in such large companies.
In recent times international funds are gaining traction from Indian investors who believe these funds may protect their portfolio against country risk and currency risk. The double digit returns in such funds since 2019 is being utilized as a marketing ploy by AMCs to continue the inflow of money – if not in Indian Markets at least into International Markets – as long as money keeps coming in!
Ladies and gentleman, Recency Bias is what this is!
Our goal is to shed light on the Risks & Rewards associated with international funds for an investor to decide if such funds fit into our asset allocation and our portfolio?
Let’s understand International Funds better?
Yes, international funds do act as a diversification to our portfolio as they have the least correlation with Indian mutual funds. What investors fail to realize is that when we invest in to such funds, we face 2 risks as we are investing in to 2 asset classes:
- International Stock Market Risk
- Currency Risk – INR being converted in to USD while purchase and vice versa
These 2 factors make International Funds a high return and high risk asset class.
Investing in 2 asset classes have 4 types return repercussions we need to consider:
- Company Value Increases + INR Depreciates = Maximum Returns
- Company Value Increases – INR Appreciation = Average Returns
- Company Value Decreases + INR Depreciation = Low to Average Returns
- Company Value Decreases – INR Appreciates = Substantial Loss
Therefore, our highest probability of return is at 25%. Would we want to take such a call? Current Indian markets and economic status quo has created a scenario of highest return from International funds – making the present scenario attractive for investors.
Does this mean that investors ‘Should Not’ invest in International Funds?
All mutual funds and all financial goals are created with an objective: is the investment objective of the fund is in line with your specific investment goal, risk appetite and liquidity?
Let’s understand the pros and cons before we make an informed decision?
Opportunity & Challenges of International Funds
- Global Diversification: International Funds being global in nature, have the lowest correlation to Indian markets thus acting as a perfect diversification for our portfolio.
- Hedge against Country Risk: Investments, like economies vary in delivering returns. Investing in a foreign economy reduces our dependency on only our Indian economy.
- International exposure: Stock prices of Amazon and Facebook are so high that most retail investors may not have the liquidity or the knowledge to invest directly, considering knowledge of stocks, foreign economies, economies or currency. Through international funds and qualified fund managers, our money is managed better.
- Dual market risk: International funds invest in to 2 asset classes – International stocks and currency. There are risks associated with both asset classes and we as investors need to be more prudent about the investment choice.
- More than Market Analysis: International fund managers who invest in global securities must be in a position to analyze: political, social and economic aspects of various countries. Indian Fund Managers find it challenging to analyze Indian Stocks, what is their expertise to manage international economies or companies?
- Taxation: Indian Equity Mutual Funds are taxed at 10% LTCGT and 15% STCGT while International Funds are taxed at 30% STCGT and 20% LTCGT.
Investing In International Funds
Indians investing in international funds face a paradox. As Indian’s, while they wish for the Indian economy to grow and prosper, while investing in International Funds, our returns become dependent on INR depreciating, which is a sign of the Indian economy going down.
Therefore, the intention of the investor is important. If it is for higher returns, then we need to re-think our decision. If our ‘need’ for foreign currency is aligned to our long term financial goals, then based on your Financial Plan we need to understand what percentage of our savings and investments need to be assigned towards international Funds?
What does ‘need’ mean? For example: sending kids to college abroad, having family abroad, travelling abroad on work or holiday – such funds are efficient to capitalise on INR depreciation.
International funds are an innovative & efficient option. Ever heard of over-diversification?
This must be linked directly to your investment objective and long term financial goals, rather than to diversify your portfolio or getting more returns.
If you still want exposure to global investments, then there are mutual fund schemes that have a mix of domestic and international stocks. These funds have around 60-65% of their corpus in Indian equities and remaining corpus in International equities. Moreover, these funds are treated as equity schemes for taxation. That means, these schemes are taxed at 10% LTCGT and 15% STCGT. These funds can be an alternative to have global investments in portfolio, less risky than international funds and avail tax benefit of equity schemes.