What are International Mutual Funds?

The total Assets Under Management, or the total assets held by the mutual fund industry have crossed the Rs 50-lakh crore mark. This clearly speaks of the growing trust investors are reposing in mutual funds. Mutual funds provide investors with the opportunity to invest in different asset classes. Mutual fund schemes invest in various assets ranging from equity to debt, gold, and silver. Additionally, there are specific focused schemes catering to goals such as retirement planning and children’s education. Moreover, if you want to invest in foreign markets, you can also do so through international mutual funds. So, lets see what international mutual funds are and how these work?

International funds are mutual funds through which investors can invest in companies of other countries. This means an investor residing in India can invest in the shares of companies in the USA or the UK, all by means of international funds.

These funds invest in listed shares and debt securities in the foreign markets. In addition to this, you can also invest in Exchange Traded Funds (ETFs), which invest in listed shares on foreign stock exchanges. These are called Overseas ETFs. There is also an overseas category of Fund of Funds (FoF), where a minimum of 95% of assets are invested in foreign funds.

Why should you include international funds in your portfolio?

One way for an investor to reduce risk in their investments is to diversify their portfolio. For this, investors invest in different types of funds. There may be a situation where the domestic economy is not doing well, but a foreign economy is in a better position. In such cases, investors can benefit from investing in international funds. This helps them in portfolio diversification.

How does investment work?

Investing in international mutual funds is not very different from purchasing units of domestic mutual funds. You invest in rupees and, in return, receive units of international funds. The scheme you invest in will further invest in listed shares in foreign currency. This allows you to participate in the development of foreign economies as well. For investors in India, there are various options available in international funds based on countries, themes, sectors and technology.

What do RBI regulations say about international funds?

As per RBI regulations, domestic mutual funds can invest up to $7 billion in foreign stocks. In addition to this, they can invest up to $1 billion in ETFs. Since this limit of $1 billion investment is nearing its end, SEBI has instructed mutual fund industries to stop new subscriptions in foreign ETFs effective April 1, 2024.

Why is there a need for a limit?

By setting a limit on investments in international funds, RBI aims to maintain the balance of payment equilibrium. The Reserve Bank of India is trying to limit the outflow of foreign currency for the stability of the Indian currency. Therefore, even international mutual fund schemes will have to limit their investments. However, until SEBI issues separate guidelines, investment in foreign securities, excluding foreign ETFs, may continue.

What do experts say?

According to Hemant Rustagi, CEO of Wiseinvest, there are still opportunities for investors to invest in foreign stocks through funds. Those who have invested in international funds within the specified limit and in markets with good prospects should continue their investment.

How much returns these funds have generated?

Talking about returns, until April 5, 2024, foreign ETFs have given an average return of 38.8%, 25.2%, and 16.4% in 1, 3, and 5 years respectively. During the same period, the return on international funds was 24.8%, 5.8%, and 10.3%, respectively.

How much tax is levied on earnings in such funds?

When it comes to taxes, it is essential to compare investments in equity. Funds that have invested less than 35% of their assets in equity will be taxed on the earnings generated by the investor, based on their applicable tax slab.

If the fund has invested 35% or more in equity, it will be considered an equity-oriented fund. A flat tax rate of 10% will be applied to earnings from equity. However, a profit of up to Rs. 1 lakh in one financial year is tax-free.

How much is the risk involved?

There is always a risk in investing in equity worldwide. Despite this, investors in international investments should be cautious about risks associated with the economy, politics, and tax regulations of that country. Additionally, since investments are made in the currency of that country, investors also bear the risk associated with currency fluctuations.