How to invest in international mutual funds?

Investing in shares of companies like Apple, Amazon, Google, Facebook, Netflix and Microsoft would be a dream for many investors in India. The products or the services offered by these companies have become an integral part of our lives.

These world-class companies have weathered the COVID-19 storm and their shares have outperformed the benchmark indices because of which these companies feature in the wish list of many Indian investors (‘investors’).

Can investors turn their wish of investing in these companies into reality?

Let’s find out.

1. How can investors invest in these global companies that aren’t listed on the Indian stock exchanges?

There are broadly two ways in which investors can invest in these global companies. Investors can directly buy shares listed on foreign stock exchanges or they can invest in international mutual funds that invest in such stocks.

2. Which is the preferred way to invest?

Investors who wants to buy the shares would be required to open bank, demat and brokerage accounts abroad or visit a domestic broker who provides the said facilities. Further investors will have to go through the hassles of researching about the companies, understanding the dynamics of the markets in which these companies operate etc. which makes international mutual funds a preferred way to invest.

3. What are international mutual funds?

International mutual funds are basically mutual funds which invest in companies which are located outside the investor’s country of residence. These funds invest in shares of the companies listed abroad such as Apple, Amazon, Google, Facebook, Netflix and Microsoft or they invest the entire corpus in indices such as Nasdaq 100 and S&P 500.

4. What are the benefits of investing in international funds?

• International funds give a diversification needed in portfolio of investors.
• International funds allow investors to indirectly invest in some of the world-class companies like Apple, Amazon, Google, Facebook, Netflix and Microsoft.
• Every economy has its own economic cycle. Some economies may be on an upswing while some may be in a downturn. By investing across various economies through international funds, investors can take the benefit by investing in economies which are on a growth trajectory while limiting their exposure in economies which are in downturn.
• Investors make investment in Indian Rupee (INR), which is then changed to a different currency, depending on the country in which it is invested. Now if the foreign currency in which the investments are made gains in value against the rupee, investors profit will increase to that extent. Historically the Indian Rupee has depreciated against the US dollar. Accordingly it gives investors the benefits of currency depreciation.

5. In which economies the international funds invest?

Some international funds invest in developed economies such as the USA while other funds may invest in the emerging markets.

6. In which economy investors should prefer to invest?

Since India is an emerging market, it is advisable to invest in developed economies like USA. Further investors should invest in those developed economies that are performing well and have a lower correlation to emerging markets like India.

7. Should investors prefer Index funds and ETFs over actively managed international funds?

For investors who are beginning to invest in the international markets, it is preferable to invest in international funds that, in turn, invest in a foreign stock market indices such as the Nasdaq 100, S&P 500, etc. rather than investing in actively managed international funds.

8. What are the tax implications on the capital gains earned on redemption of international funds?

International funds are taxed as debt funds. If investors are invested for less than three years, the capital gains are taxed at the tax slab applicable to their total income. If they stay invested for more than three years, capital gains can be taxed at 20 percent with benefit of indexation.

Final thoughts

India’s share of global gross domestic product (GDP) is roughly 7 percent. So there is roughly 93 percent of the untapped markets wherein the investors can look out for investments.

Depending on the risk appetite, Investors can allocate around 10 to 12 percent of their portfolio in the International funds.

Disclaimer: The article is written by CA Kashish Mehta and CFP Deshna Mehta. We are not SEBI registered advisors. The information mentioned in this article is compiled from various sources. We have made upmost efforts to provide authentic information, however, we do not undertake any liability in any way whatsoever, to any person in respect of anything by placing reliance upon the content of this article. The views expressed are our personal opinion and does not constitute a financial advice. Seeking professional advice is recommended before taking any action based on the information mentioned in this article.