International Mutual Funds: Types, Benefits And How To Invest

Mutual funds

International mutual funds are perfect for people looking to invest beyond geographical restrictions and explore international markets. 

Investing through mutual funds in companies listed in India is easy. But if you want to invest in companies outside India, International mutual funds or overseas or foreign funds can help you do so. 

In this post you will learn how International Mutual Funds work, who should invest, its types, tax implications, benefits, and factors to consider before investing in international mutual funds. Read on!

How Does International Mutual Fund Work?

International mutual funds work similar to any other equity mutual fund, i.e., the investing methods are the same and they are regulated by the Securities Exchange Board of India (SEBI). The fund manager collects money in INR and invests in companies listed outside of India in exchange for units of funds that are allocated to the investor. There are two ways in which money is invested in foreign stocks: the fund manager directly purchases stocks to build an investor’s portfolio or they invest in a global fund consisting of stocks of foreign companies. 

Who Should Invest In International Mutual Funds

While all investors can invest in international mutual funds at their own risks, it’s not ideal for everybody. People belonging to at least one category of investors given below can invest in international mutual funds.

• Investors With A Well-Diversified Portfolio: People who have a well-diversified portfolio generally have a good grip over how these work and can invest in international mutual funds with confidence for greater returns. However, if people have a financial advisor to help them with investing in international funds, they can enjoy higher returns. 

Also Read: 5 Ways To Diversify Your Investment Portfolio in 2022

• Investors Familiar With The International Markets: It’s important to know how the markets work before investing in them. People who are familiar with the working of international markets, the various financial instruments, and the factors involved can invest in international mutual funds. Famous global brands like Netflix, Apple, and Facebook, among others, aren’t listed in India. Investors wishing to invest in such companies for guaranteed high long-term returns need to know how these work.
• Investors With High-Risk-High-Reward Appetite: International mutual funds are high risk. But just like all high-risk funds, they generate huge returns. Some investors who like taking such kinds of risks would enjoy investing in these funds. 
• Investors with long-term investment plans: Building an early retirement fund can come in handy for a myriad of future plans like children’s education, future home, etc. Investing in international funds can help people reach their retirement goals faster because of the effects of compounding, escaping the volatility of equity markets. 

Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing.

Types Of International Mutual Funds

• Global Funds

While most people get confused between global funds and international funds and use them interchangeably, they’re quite different. Global funds are funds that invest in various securities from across the globe including the investor’s home country. International mutual funds, on the other hand, invest in securities globally, except for the ones in the investor’s home country. Global funds are a superset of international mutual funds but are categorized as a type as well.

• Theme-Specific Funds

These types of international mutual funds follow a theme-based approach to investing. If an international mutual fund has a theme of Telecom Services, for example, it’ll invest internationally in brands like HBO, Warner Bros., etc. The primary focus of such international funds is to gain returns from a successful sector of business.

• Regional Or Country-Specific Funds

As evident from the name, these funds invest in regional markets or target a specific country or countries. This helps investors identify regions with potentially good economies and capitalize on the opportunities there.

Taxability Of International Mutual Funds

Since international mutual funds invest majorly in equity and related instruments, you may assume that they would be taxed like all other equity mutual funds in India. However, international mutual funds are not classified as equity funds. They are taxed as debt funds. Under the debt taxation structure, when one gain profits by selling the investment, they make capital gains and these are taxed based on how long an investor held their investment:

• Short Term Capital Gain (STCG) – STCG are termed so when the international fund investment is redeemed within three years. These profits are then added to the investor’s income and they are taxed based on the tax bracket they fall under. 
• Long Term Capital Gain (LTCG) – If an investor holds on to the investment for more than three years, the returns are classified as LTCG and are taxed at 20% after indexation. Indexation is the process of adjusting the purchase price of an investment according to the inflation rate.

Also Read: What Is 80C, And How Mutual Funds Can Help In Claiming Tax Exemptions Under This Section?

Factors To Consider Before Investing

• Socio-Economic Risk – Economic and political factors heavily affect international mutual funds, or any fund for that matter. A drastic shift in either of these can negatively impact an investor’s investments. This impact is going to be much higher in international funds than if the same happened with other equity funds. 

• Expense Ratio – The Asset Management Companies (AMCs) charge the investor a fee called an expense ratio annually, to cover all administrative costs and the fund manager’s cut.  

• Currency Risk – Based on the chosen international mutual fund, the money invested in INR is converted into the appropriate currency. If this currency appreciates with respect to the Indian rupee, it positively impacts the investor’s portfolio, and negatively impacts the portfolio if it depreciates with respect to the Indian rupee.

• Tax Efficiency – Carefully deciding whether to capitalize on STCG or LTCG is crucial to invest in international mutual funds. This helps in deciding whether an international mutual fund is worth investing in. When done with the help of a financial advisor, tax-efficient investing can be easy. 

3 Benefits Of Investing In International Mutual Funds

1. Greater Diversification With No Geographical Barrier – Diversification can be the biggest advantage that international mutual funds offer the investors. When the home country economies are taking a hit but foreign countries are blooming, investing globally can fetch great returns. 

2. Access To International Markets And Global Brands – By investing in foreign funds, investors gain exposure to global markets and know how they work while gaining experience. Owning portions of huge global brands is now easy.

3. Cost-Effectiveness Of Investment Portfolio – Overseas funds guarantee currency diversification and thus increase the cost-effectiveness of investors’ portfolios. 

How To Invest In International Mutual Funds With Navi

Investing in International Markets with Navi is just a few clicks away. Follow these steps to start investing now:

1. Visit the Navi website or download the Navi app on on Android or iOS .
2. Hover over to international mutual funds and click ‘Invest Now’ once you finish KYC.
3. Choose a preferred platform and proceed to invest the desired amount in a preferred fund.

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

Final Word

This comprehensive article on international mutual funds, their advantages, risks, and types should have given you a rough idea of whether they’re a good fit for you or not. It is important to bear in mind that investing in foreign funds can give you very high returns or very huge losses. Always remember to diversify and invest only the amount you can afford to lose in one particular fund. Happy investing!

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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.