Investing in mutual funds is a great way to diversify your portfolio and earn returns on your investments. International mutual funds are a type of mutual fund that invests in foreign markets. In this article, we will discuss what international mutual funds are, how to invest in them, how they work, who should invest in them, taxation on international mutual funds, factors to consider before investing in them, and the advantages of foreign funds.
What are International Mutual Funds?
International mutual funds are mutual funds that invest in foreign markets. These funds invest in stocks, bonds, and other securities of companies listed outside India. The objective of these funds is to provide investors with exposure to foreign markets and diversify their portfolio. International mutual funds are managed by professional fund managers who have expertise in investing in foreign markets.
How do international mutual funds work?
International mutual funds work like any other mutual fund. The fund manager pools money from investors and invests it in foreign markets. The returns on these funds depend on the performance of the foreign markets. The fund manager charges a fee for managing the fund, which is deducted from the returns generated by the fund.
Advantages of Foreign Funds
Investing in international mutual funds has several advantages:
- Diversification: International mutual funds provide investors with exposure to foreign markets and help diversify their portfolio.
- Growth potential: Investing in international mutual funds provides investors with access to the growth potential of foreign markets.
- Currency hedge: Investing in international mutual funds provides investors with a currency hedge against the depreciation of the Indian rupee.
What are the different types of international funds?
There are many international funds available in the Indian financial market. Each type of fund involves a unique approach towards global investing. Based on these approaches, here are three categories of international funds:
Category |
Description |
Thematic International Funds |
These funds adopt a theme-based investing approach similar to domestic thematic mutual funds. For example, if infrastructure is the theme, the fund will invest in foreign companies related to infrastructure sectors like cement, power, and steel. |
Region or Country-Specific Funds |
These funds focus on investing in the stock markets of a specific region or country. For instance, there are funds dedicated to the US stock markets or Asian markets. The objective is to capitalize on the opportunities within these markets for potentially higher returns. |
Global Markets |
Unlike region or country-specific funds, global market funds invest across the world instead of targeting specific regions or countries. They hold stocks from various countries, aiming for diversification. This strategy helps mitigate risks by spreading investments across different markets. |
Who should invest in international funds?
International mutual funds are suitable for investors who want to diversify their portfolio and earn returns from foreign markets. These funds are also suitable for investors who want to take advantage of the growth potential of foreign markets. However, investors should be aware that investing in international mutual funds involves higher risks than investing in domestic mutual funds.
Taxation on International Mutual Fund
International mutual funds are taxed like any other mutual fund. The returns generated by these funds are taxed as capital gains. The tax rate depends on the holding period of the investment. If the investment is held for less than three years, it is considered a short-term capital gain and is taxed at the investor’s income tax slab rate. If the investment is held for more than three years, it is considered a long-term capital gain and is taxed at 20% with indexation.
