For most of us, the current lockdown due to the Coronavirus, or Covid-19, over the past two months, has been one of isolation with a steep rise in screen time. Movies on platforms such as Netflix, Amazon Prime Video, Hotstar, etc., videos on YouTube, surfing and posting on social media sites such as Facebook, Instagram, etc. or reading the news on Google News and other online news apps… the list is endless. These platforms have seen a steep rise in user base and subscriptions. For instance, Indians form the highest user base of Facebook with 280 million users as on April 2020. Netflix saw its paid subscriber base reach an astounding 15.8 million in the first three months of 2020. Between February and April, the monthly percentage growth rate of daily active users on online streaming platforms Netflix and Amazon Prime video shot up by 122% and 72% respectively.
Now, here is a thought. Since these online platforms are raking in funds with a rising subscriber base, giving their investors a reason to cheer, it would make sense for you to invest in such platforms too. By adding these profit-making corporations to your portfolio, you could generate higher returns and achieve other benefits such as diversification and rupee hedging (most of these online platforms are listed on foreign stock exchanges). You would have marquee names such as Google, Amazon, Facebook, Netflix, etc. in your investment portfolio.
You may wonder how to go about investing in such companies since they are listed abroad. Read on to find out…
Investing abroad
There are broadly two ways you can invest in foreign stock markets – you could directly invest in stocks listed on foreign stock exchanges or you could invest in international funds offered by Indian mutual funds. It would make sense to choose the latter since investing directly abroad would be cumbersome requiring you to open a bank account, Demat account and brokerage account abroad, remit funds into your foreign account, study the markets and individual stocks, understand currency issues, keep track of political and other developments, and so on. Instead, a simple and hassle-free way is to invest in international funds.
About international funds
International funds are offered by Indian mutual funds giving Indian investors an opportunity to invest in foreign markets. These funds invest in stocks of companies listed abroad such as Apple, Google, Microsoft, Facebook, Netflix, etc.
International funds come in various forms – some invest directly in stocks abroad; some are feeder funds, which invest in funds abroad while others invest in foreign indices such as the Nasdaq100, S&P 500, etc.
International funds can also be categorized in terms of the geographies/markets or sectors they invest in. While some funds invest in developed economies such as the US, Japan, etc., others invest in emerging markets; some funds invest across geographies/markets.
International funds can also be categorized in terms of the kind of securities they invest in – equity or debt. This article focuses only on equity-oriented international funds.
Benefits of investing in international funds:
There are two key benefits of investing in international funds; they are
Diversification: Every economy has a different growth cycle; while some economies may be going through a downturn, others could be on an upswing. By investing across economies at different growth cycles, the growth cycle of one economy will help boost the quality of your portfolio and protect you from the downturn of another economy; it also helps you capitalize on opportunities in the growth economy.
Investing in top-performing global companies: By investing in international funds, you get the opportunity to invest in the best global companies and hence, profit from their growth. For instance, top-performing global companies such as Amazon, Google, Facebook, etc. could be part of your investment portfolio through international funds.
Currency implications:
When the INR depreciates in relation to the currency of the country in which the international fund invests, investors stand to benefit as the NAV of the international fund will rise corresponding to the depreciation in the INR (in addition to rising due to growth of index/companies the fund invests in). If your financial goals include providing funds for foreign education for your children or relocating abroad, investing in international funds will provide a good hedge against currency fluctuations. However, here is a caveat; if the INR appreciates, investors will receive lesser if they redeem at this point.
Tax implications:
International funds are taxed like debt funds. If you stay invested for less than 3 years, the capital gains are taxed at the tax slab applicable to your total income. If you stay invested for more than 3 years, capital gains are taxed at 20% with indexation.
How to choose international funds:
Apply the following parameters to select a suitable international fund to form part of your investment portfolio:
Diversification: It’s advisable to invest in developed countries that are performing well and have a lower correlation to emerging markets like India. India is an emerging market (in fact, one of the best performing emerging markets), it may not make sense to invest in another emerging market since it would not provide you with any real diversification. The US is currently on a growth cycle and the country’s markets have listed the best performing global companies such as Amazon, Facebook, Netflix, etc. making it one of the best markets to invest in. This is evident from the rise in the Nasdaq100 index which is composed of prominent global companies such as Facebook, Microsoft, Amazon, Alphabet, etc. The Nasdaq100 has delivered attractive 10-year CAGR returns of about 18%. As against this, the BSE Dollex 30 has delivered CAGR returns of a mere 0.03% over the same period. The BSE Dollex 30 index is a like-to-like comparison with the NASDAQ since its constituents are the same 30 companies that form the BSE Sensex, but their prices are in USD terms. With the USD strengthening against the INR, even while the companies have performed well, the strengthening dollar (and lower INR value) has resulted in returns falling to nearly zero over the 10-year period.
Index funds/ETFs: It’s preferable to invest in international funds that, in turn, invest in a foreign stock market index such as the Nasdaq100, S&P 500, etc. than investing in actively managed international funds. Investing in the index not only brings top-performing companies into your investment portfolio (since such companies usually form part of such foreign indices), it also reduces the risk of possible investing errors that could result from active fund management.
Currency angle: It’s advisable to invest in foreign markets whose currency is appreciating against the Indian rupee. For instance, the Indian Rupee (INR) depreciated against the US dollar significantly. From around Rs 46 in mid-2010, it has depreciated to Rs 75.95 as of 18 May 2020. the US markets that are represented by the US dollar are attractive since the INR has been depreciating against the USD, which results in a rise in the NAV of international funds investing in the US markets.
How much to invest in international funds:
Any investment you make should be based on an analysis of your risk appetite, financial goals/investment objectives, and investment tenure. While some investors with a high-risk appetite could invest a higher amount in international funds, those with a lower risk appetite would prefer to invest a modest amount in such funds. However, to achieve meaningful diversification, it’s advisable to invest at least 10-15% of your portfolio in international funds.
To conclude, investing in international funds will give your portfolio an advantage due to geographical diversification and including winning companies’ stocks in your portfolio.
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