International funds as the name suggest are those which invest in the securities of other foreign countries. Depending on the fund structure, it may invest in securities of a specific country Like US, Europe, China or may have allocation spread to different countries. It may come up as a specific sector allocation Like Gold or Agriculture or maybe diversified in different sectors. Some schemes are fully into international allocation, whereas some have some portion of allocation into International equity.
All in all, International funds come in many flavors. And from an investment perspective, the question comes, if it is wise to even look at these funds? Will it serve some purpose?
Before going ahead let me show you a table of different countries performance.
The above tables show different countries’ stock market returns in different years. India is there in the emerging markets table. But in none of the years, it was on the Top. In fact, none of the countries stayed on top for long. On some instances, all of the countries have given negative performance but many times the difference in return is quite huge between countries.
(Also Read: Index funds in India – How attractive is Passive Investing?)
There are so many countries in the world and every country has its growth story, its own economic cycle which may be different from India. Is it possible to participate in other countries growth? Is it advisable or it is wise only to stick with our own country?
From Investment diversification point of view, the answer is Yes. It is wise to have some international allocation through International mutual funds in India.
International funds on one side expose you to the growth story of the other countries there it also helps you diversify your currency and exchange rate risks too. As the table above is showing that different economies perform at different times so (at least theoretically) international funds let you take advantage of the other countries’ economic cycles.
The Rupee depreciation also helps in enhancing the returns from investing in the foreign markets. If you remember in 2017 when Oil prices were very high, the Rupee also faced heavy depreciation, that time Indian Indices were down but the funds exposed to US markets were doing great.
But there is other, side of the coin too. Though International allocation looks attractive in the hindsight considering the past returns, there it has lots of confusion and risks connected to it.
First is that when you do not understand the Indian economy that well and the so many factors influencing it, be it economical or political, how easy it would be for you to understand the other country’s economy? To Invest Internationally even through International Mutual funds requires some knowledge on which country looks better to invest in and why.
Second is the Currency risk, rupee depreciation may enhance your portfolio return, but what if the Rupee appreciates. If you have strong conviction on India growth story and development, then the chances of Rupee appreciation in the future are good. No?
Also, what about the Currency fluctuations of the country where you would be investing in? as Most of the International investments are done in dollars, and when you invest in say Europe the relationship between Dollar and Euro also play its role.
Third, being considered as Non-equity fund from a taxation perspective, you will be charged with the taxation of 20 percent post Indexation and any gain booked before 3 years will be added in your Income.
Besides all this, the trade War, Political issues, economic slowdown, etc. all impact the global scenario and thus International funds. The international markets are as sensitive as our Sensex, so fear and greed work over there too. Any good or bad news has its own impact.
(Also Read: Are Balanced Advantage Funds better than balanced funds?)
If you look at the last years of performance of the International mutual funds in India. You will find that not all are performing every time, and even consistency has its challenges.
International Mutual Funds in India – Performance table
But still, if you compare them with Indian markets where we have also not performed that well in recent years, adding some well-managed funds will provide required diversification to the portfolio and may support well in the different Market cycles.
International Mutual funds in India – Conclusion
I am always in favor of International funds. It gives diversification to the Investment Portfolio. Returns have always been secondary to me, but I have experienced at many instances that when Indian stocks were not doing well, this exposure gives a Relief to the overall portfolio returns. Which fund to select, which country to go with…these are some of the questions even I don’t have the answer to.
So I prefer to stick with the US-oriented funds only. Being a world’s largest economy with more than 50% of world market capitalization, and with some of the biggest companies of the world listed there, it feels like if something has to happen to US the world is going to be impacted too.
But with this limited understanding of the international markets, it is better to have not more than 5% exposure to them. Moreover when Indian Markets are equally capable of delivering good returns over a long period of times why to increase the exposure to international funds.
how these international MFs are taxed in india, whether short term or long term. what should be holding period to get benefit of LTCG
International funds are taxed at 20% post indexation if the holding period is more than 3 years and any gain booked before 3 years will be added in your Income.