What are International Mutual Funds?

In the last 2 years, the Dow Jones index and the NASDAQ index have more than doubled. Stocks in the US markets like Amazon, Microsoft, Nvidia and Tesla have been among the prime performers beating the index by a huge margin. Can an Indian investor sitting in India investing in these international assets.

Today, it is even possible to invest directly in global stocks either through your brokers or by directly opening accounts with global broking houses like Ameritrade. However, that may be too complicated for most investors to invest directly in global stocks. One way out is to invest in international mutual funds and indirectly participate in the global story.

But, what exactly are international mutual funds?

An international fund is normally a fund of funds (FOF) that invests in international ETFs and international indices. This concept of international funds started with funds that had global affiliations. For example, Franklin Templeton was offering international funds through its global parent. DSP was offering Blackrock funds to Indian investors.

In these cases, the international fund acts as a feeder fund for the funds of the parent. The Indian fund collects monies from investors in its international fund and then invests the same in the funds promoted by its international partners or sponsors. The process of getting units credited and getting funds on selling are slightly longer than normal domestic funds.

What are the different categories of international funds?

International funds are normally macro funds that invest in broad themes. Here are some important categories of international funds that you would get to choose from. Not all of them may be available for Indian investors at this point of time.

1. Global Funds are a category of international mutual fund that allows investors from all countries to invest, including investors from their home country. They normally maintain a diversified global portfolio of assets from across the globe and from across asset classes.

2. Regional Funds are specific to a certain geographical region. For instance, if you invest abroad, focusing on a particular geographic area, then it can be classified as a regional fund. A few investors focus on buying multiple regional funds instead of global funds. Regional funds can focus on emerging markets, frontier markets, LATAM markets etc.

3. Country Funds, as the name suggests, are focused on just one foreign country and not anywhere else. That is the origin of the name country fund. Because the data is not spread across various countries, this is one of the easiest funds to invest internationally. If you are focusing on a particular market like US or China or Japan, this is the best option.

4. International Sector Funds focus on a specific sector of the economy in other countries. This works well for investors who wish to invest in a specific sector, or who are looking to take a very focused position. Most sector funds globally are positioned as thematic funds covering a broader theme than just an industry group.

5. International commodity funds are quite popular if you are looking at a specific industrial or precious commodity. So international gold funds or international mineral funds or even funds are all examples of international commodity funds.

Are there any special benefits of investing in international funds?

Apart from the fact that it gives the investor the benefit of a wider choice, there are some genuine benefits of investing in international funds.

• The first benefit of international funds for investors is Diversification. This not just gives local diversification but diversifies internationally and you get the benefit of finding markets that are not correlated to India.

• Exposure to different economic themes is the other big advantage of international fund investing. Effectively, you are able to capitalize on the gains from different economies. Investing across economies also allows the investor to mitigate risk and reduce the overall volatility of their portfolio.

• Unlike directly investing in international stocks, by going through international funds floated by mutual funds, you get the benefit of Professional Management. For you, individually, it would be tough to understand and judge markets in different countries. Hence, it is best left to the experts. These fund managers have in-depth expertise and knowledge about such global markets that they invest in.

Are international fund meant for me as an investor?

Normally, this is a question that should be answered by your financial advisor. When you make a financial plan, you must figure out how much you can afford to save in international funds and then do the allocation. However, here is a quick red book for international mutual fund investing.

• Investors looking for internationally diversified investment portfolio must consider investing in international mutual funds.

• However, extent of allocation is important. You can use a thumb rule that exposure to global funds must not exceed 10-15% of your overall investments portfolio.

• International funds are meant for investors who can give time of at least 5-7 years for their portfolios. That is the time it takes to delivery meaningful results.

• Finally, it calls for a higher risk appetite. After all, you are getting into new-fangled markets, which you don’t understand too well. Allocate cautiously on this front.

What are the next steps; how do i go about international fund investing?

Firstly, talk to your financial advisor and ensure that these international funds fit into your perspective. It must be in sync with your goals. Broadly, there are two ways of investing in international funds. You can invest online and you can also invest offline. Here is how you go about it.

You can invest online through online investment portals or through asset management companies that offer the international mutual fund. Of course, KYC completion is a must. You can also invest using the conventional, offline method where you invest through a broker or submit a filled form at a fund house.

Finally, there are tax implications. In India, all international funds and FOFs are treated as non-equity funds. That means holding up to 3 years will be short term gains. Also, the tax rates applicable are higher than regular equity funds.