Should Young Investors Invest in International Mutual Funds?
Welcome to International Mutual Funds which precisely allow you to do that. This article provides you with a complete lowdown on these funds and whether it makes sense for young investors like you to invest in them.
What are international mutual funds?
- Investing directly in stocks of foreign companies
- Investing their money in one or multiple foreign funds, which in turn invests in these companies (known as feeder investing)
From the perspective of investing approach, we can classify these funds into the following types:
- Country/Region-Specific: As the name suggests, these funds invest in companies from a specific region or countries like the US or Europe or Africa. Some examples are ICICI US Bluechip Fund (invests in US companies only) and Franklin Asian Equity Fund (invests in companies across the Asian region)
- Theme/Sector Specific Funds: These funds pick a theme or sector and invest in companies that fall into those themes, irrespective of the geography where it falls in. Examples include ABSL Global Real Estate Fund and DSP World Mining Fund.
- Global funds: These funds diversify themselves across markets, themes and geographies. An example is ICICI Prudential Global Stable Equity Fund
What are the benefits of investing in international mutual funds?
- Investing in these funds help you to diversify your risk and bring down the total risk of your portfolio. This is because there is little correlation between the equity markets of India vis a vis other countries.
- Companies like Amazon, Google, Facebook, Apple, Nestle, Boeing, Alibaba etc., are not yet listed in India. These funds allow you to profit from the growth potential of these well managed global companies.
- Over the years, INR has depreciated around 3-4% every year against USD. Investing in these funds help hedge currency depreciation. It is a good option for those investors who have USD denominated goals like children’s higher education in the US.
- These funds allow greater depth to your portfolio. They do that by helping you invest in sectors that are not easily covered by Indian mutual funds like aviation, defence equipment, gold mining etc.
What are the downsides of investing in international mutual funds?
- You expose yourself to the risks of Indian and other countries/geographies that you’re invested in through these funds. By diversification, your risk only gets spread out. It does not get extinguished.
- Due to higher brokerage and fund management costs, these funds carry a higher expense ratio than Indian equity funds.
- Income from these funds is taxed as debt funds in India. This means that any income within 3 years is taxable as short-term capital gain as per your income slab. Long term capital gain is taxable at 20% with indexation benefit.
Should you invest in international mutual funds, and what you should keep in mind while investing?
Over time you may start doing focused goal-based planning, and your investment portfolio will also increase through regular investments. It is then that you can consider adding these funds for your long-term financial goals. Take care to keep it simple and not include more than 2 such funds in the portfolio. You can also tag the same fund to multiple financial goals by investing in separate folios.
Some other points as follows:
- Don’t go overboard on these funds, especially if your goals are due to mature in INR. Try to have a maximum allocation of 25% of the portfolio’s equity portion in these funds. If the goal is a USD based goal like a child’s higher education, only then should you consider a higher allocation to these funds.
- Amongst the funds, it is better to stick to a larger and sophisticated USD-based economy like the US. The reason is that given the strength of USD, a currency hedge against USD is much more potent as compared to other currencies.
- While selecting a fund, do check if it is consistently able to beat the index benchmark. Also, check the expense ratio. If a higher expense ratio bothers you, you can consider ETF. You will need to have a Demat account for that.
- Try not to make any tactical allocations to profit from short term movements in these funds without deep knowledge.