In this article, we will be discussing what are International Mutual Funds and what are their different types. So, let’s get started!
What are International Funds?
- International Funds, also known as overseas funds are Mutual Funds that invest in assets (Equity, Debt, or other) listed outside the investor’s home Country, in our case outside India.
- Currently, there are more than 60 International Funds in Indian markets of different types.
- These funds provide you with diversification opportunities outside domestic markets.
- Their taxation works like Debt Funds irrespective of type.
Types of Mutual Funds:
- International Funds can be broadly classified into 2 categories namely: On the basis of Strategy and On the basis of Investing Style.
- Based on Strategy, there are 5 kinds of international mutual funds, that are:
- Country Funds
- Regional Funds
- Global Funds
- Global Sector Funds
- Commodity Funds
- Based on Investing style, there are only 2 types of international mutual funds, that are:
- Actively Managed
International Mutual Funds based on Strategy:
1) Country Funds:
- As the name suggests, a country fund is a fund that invests in a particular country.
- Example: Edelweiss Greater China Equity Offshore Fund: A Fund of funds that will invest in companies domiciled in China or whose primary operations are in the Greater China region. Motilal Oswal NASDAQ-100 ETF: An index fund that invests in NASDAQ – 100 ETF. NASDAQ is a US-based stock exchange. HSBC Brazil Fund: A fund of fund that invests in companies listed in Brazil
- Example of Country Funds:
- There are many geography-specific international mutual funds available in India with a high presence of funds focusing on 5 countries: the USA, China, Taiwan, Japan, and Brazil.
2) Regional Funds:
- A regional fund is a fund that invests in securities across a specific geographical region like Europe, Asia, etc.
- Franklin Asian Equity Fund: Principally invests in Asian companies/sectors, excluding Japan.
- Kotak Global Emerging Markets: Fund of funds that invests in mutual funds with a primary goal to invest in emerging markets.
- Edelweiss ASEAN Equity Off-shore Fund: An equity fund that invests primarily in companies of countries that are members of the Association of South East Asian Nations (ASEAN).
- Example of Regional Funds:
3) Global Funds:
- A global fund is a fund that invests in companies that can be located anywhere in the world, whether the investor’s own country or any other foreign country.
- Kotak Global Innovation Fund of Fund: This fund invests primarily in equity securities issued by companies worldwide, including emerging markets.
- HSBC Global Emerging Markets Fund: This provides exposure to equities where economic development is driven by favorable long-term trends, providing a platform for longer-term corporate profit growth.
- Example of Global Funds:
4) Global Sector Funds:
- A global sector fund invests in specific sectors in the overseas country.
- Aditya Birla SL CEF-Global Agri: A fund of funds that invests mainly in gold mining stocks worldwide
- PGIM India Global Select Real Estate Securities: Fund of funds that invests in stocks of companies operating in the real estate and real estate-related sectors.
- Example of Global Sector Funds:
5) Commodity Funds:
- These funds invest the majority of their assets in global companies involved in commodity business such as mineral exploration, mining, agriculture, etc.
- DSP World Energy Fund: Invests in the equity securities of companies that have predominant economic activity in exploration, development, production, and distribution of energy.
- DSP World Mining Fund: Invests in the equity securities of companies that have predominant economic activity in mining
- Example of Commodity Funds:
International Mutual Funds based on Investing Style:
1) Actively Managed:
- These funds are actively managed i.e. invests directly in overseas stocks
- Franklin Asian Equity Fund: This fund invests in shares of Indian as well as emerging Asian markets.
- Nippon India Japan Equity Fund: This fund invests in securities of companies listed on the recognized stock exchanges of Japan.
- Nippon India Taiwan Equity Fund: This fund invests in securities of companies listed on the recognized stock exchanges of Taiwan.
2) Passive Funds:
- Passive international funds track the performance of international indices
- Motilal Oswal Nasdaq 100 ETF: It replicates the performance of the Nasdaq 100 Index
- Motilal Oswal S&P 500 Index Fund: It replicates the performance of the S&P 500 Index
Advantages of International Mutual Funds:
- Diversification: International funds give you the diversification benefit of investing in global markets. If domestic markets are not performing well, then it is good to invest in global portfolios.
- The expertise of professional management: Most of the time, investors do not have the resources or the knowledge which is required for managing a diverse portfolio of investments. So, international funds provide with the expertise to invest in overseas markets
- Convenience: There is convenience in terms of the administrative aspects
Disadvantages of International Mutual Funds:
- Currency Risk: Apart from global market risk, these funds also face currency risk. Returns depend upon how the Indian currency is trading with the international currency. If INR has depreciated, your returns would increase and vice-versa.
- Global Risk: Overall risk profile for these funds is very high as they are exposed not just to global market risk, and company risk but also to currency risk.
- Taxation: International funds are treated as Debt funds and taxed accordingly. International funds are mostly good for short-term risky investments and therefore this sort of taxation is a big negative.
Taxation of International Funds:
- Taxation of International Funds is similar to Debt Funds
- Short Term Capital Gain (STCG): If you redeem your international fund investment within three years, then it is termed as Short Term Capital Gains. These gains or profits are added to your income and are taxed according to the tax bracket you fall in.
- Long Term Capital Gain (LTCG): And, if you invest for three or more three years, then your returns are classified as Long Term Capital Gain (LTCG). Such gains are taxed at the rate of 20% percent after indexation
What Should Investors Do?
International Mutual Funds are good options to diversify investments and invest in developed countries, emerging economies, global themes, etc. Also, along with a good investment option, there is the responsibility of understanding the economies in which the fund is investing. Investing in mutual funds especially international mutual funds only based on past returns must not be considered a good step to start upon. Do follow due diligence before making an investment decision.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.