Q. I am a 35-year old working professional. My husband and I both wish to invest in international mutual fund schemes, however, we are not sure about (a) how to select a scheme and (b) the procedure, taxation, and eligibility criterion, applicable in the case of an international mutual fund scheme.
Sneha Duggal, Noida
International mutual funds schemes, also known as overseas funds schemes, are mutual funds schemes that invest primarily in the stocks of companies listed outside of India. Indian mutual fund houses came up with these products because many Indian investors wanted to invest in international equity markets, especially in the US stock market through mutual funds.
By investing in non-Indian companies, these funds help you in diversifying your investment portfolio geographically. They allow you to invest in some of the world's biggest companies, in which you would not have otherwise gotten an opportunity to invest.
Before discussing the criteria to select an international mutual fund scheme and its key features, let us first understand how an international mutual fund scheme works.
International mutual fund schemes of Indian mutual fund houses are very similar to domestic mutual fund schemes, the key difference is that the corpus is invested in foreign companies. The fund manager invests your money in international stocks in two ways.
- By directly investing in stocks and building a portfolio.
- Or, by investing in a global fund that already has a pre-designed portfolio consisting of stocks of international companies.
Different types of international funds
Investors in India have access to a wide variety of international mutual fund schemes. They all approach international investing in different ways. Some of the categories are:
Thematic International Funds
These funds are similar to domestic thematic mutual funds wherein the fund follows a theme-based investment approach. For instance, a domestic thematic fund with the theme of infrastructure will invest in the stocks of steel, power, and cement firms. Similar to this, a thematic international fund will buy shares in international companies that are related to the theme.
International Index Fund
These funds are similar to domestic index funds, however, instead of tracking Indian Indices like Nifty 50 or Sensex these funds track foreign Indices like Nasdaq 100, S&P 500, etc. These funds are passive funds, mutual fund manager’s investor is bound to invest in the companies which constitute the international index which the fund is tracking. For example, in the case of Motilal Oswal Nasdaq 100 ETF, the corpus of the mutual fund is invested in the 100 companies constituting the Nasdaq100 index.
International Fund of Funds
These funds are similar to the domestic fund of funds, however, instead of investing in Indian mutual funds these funds invest in foreign mutual funds. By investing in an international fund of funds, you can get exposure to multiple foreign mutual funds. Very often, these funds invest in a particular sector/industry, for example., the information technology sector.
Factors to consider when investing in an international mutual fund
Depending on the type of international fund, your rupee investment is converted into currency based on the fund's investment approach. So, if your fund invests in the US markets, your investment in rupees will be converted to US dollars (USD). You will benefit if the US dollar appreciates with respect to the Indian rupee. It will, however, have a negative effect on your portfolio if the US dollar depreciates in value against the rupee. Historically, in the long run, the US dollar has always appreciated against the rupee, however, there is no guarantee that the US dollar will continue to appreciate against the rupee.
Know the costs that eat into your earnings before investing in international funds. An expense ratio is a cost that the asset management companies charge you. Basically, this fee is used to pay for the fund's overhead expenses, including the fund manager's salary. The fee is charged annually. In the case of international fund of funds, the expense ratio is typically higher than the expense ratio in the case of international index funds.
It is imperative that you understand the risk associated with the investment strategy of the international mutual fund and, thereafter, assess your own risk appetite and evaluate if both are aligned. For example, international mutual funds investing in technology companies may not be a suitable investment option for an investor with a low-risk appetite.
Now that we are clear about the selection criterion for international mutual funds, let us discuss the process of investment, eligibility criterion, and taxation.
The process of investing in international mutual fund schemes launched by Indian mutual fund houses is the same as the process of investing in any domestic mutual fund. You can invest through the Asset Management Company, or digitally through zero-commission investment platforms like Kuvera, or through a distributor.
Any Indian, even a minor, is permitted to invest in international mutual fund schemes.
As per the applicable rules and regulations, all international mutual fund schemes are treated as debt mutual funds for the purposes of taxation and taxed accordingly. Even if the international mutual fund scheme has invested 100% of its corpus in equities, it will be treated as a debt mutual fund. Please see below how capital gains on international mutual funds are taxed.
- Short Term Capital Gains (STCG): STCG are gains made on investments in international funds that are redeemed within three years. These gains or earnings are added to your income and taxed in accordance with the tax bracket in which you are situated.
- Long-Term Capital Gain (LTCG): If you invest for three years or more, your returns are classified as Long-Term Capital Gain (LTCG). Such gains are taxed at the rate of 20% after indexation.
Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.
Kuvera is a free direct mutual fund investing platform.