All you need to know about International Mutual Funds
Most investors have their investments in their home country, where they reside. This also carries a risk. Risk can be due to political factors, economic factors, legal factors of the country one is residing in. Investors may protect themselves from such risks by spreading their risk via investing internationally. Directly investing in foreign markets requires certain expertise. However, investors may invest internationally through mutual funds.
A good thing about International Mutual Funds is that it aids you in portfolio diversification. Investors will have a broad investment basket which allows investors to get exposure in strong international companies which are not listed in India. There are some restrictions imposed by RBI on direct foreign investment, that is, the annual overseas investment cap is US$ 2,50,000 (approx. 1.82 crore). But there are no such restrictions on investments made via International Mutual Funds. These type of funds may also be beneficial for investors planning foreign education for their children.
Investors are generally well-versed with the costs for foreign education and they do save for the same. But the savings made doesn’t discount for the changes in the value of currencies. Let us understand this with an example. Suppose an investor, in 2010 requires US$ 65,000 that is approx. Rs. 30 Lakhs, when USD/INR was around 46, for his child’s foreign education over a period of 8 years. After 8 years, that is in 2018, USD/INR is around 70 which is a change of around 52 per cent. Now, the requirement of US$ 65,000 becomes around Rs. 45.50 lakhs. With this huge increase of Rs. 15.50 lakhs, investor's plan for his child's foreign education may go haywire. Instead, if the investor would have invested in the International Mutual Funds which invests in the US markets then there wouldn’t have been any impact of the currency fluctuations.
But while investing in International Mutual Funds, investors must be aware of certain things as well. When an investor is investing in an International Mutual Fund, he is exposed to a country-specific risk for all the countries in which the fund is having investments in. This type of Mutual Funds may also pose currency risk. It influences the performance of the fund with any movement in the same. The returns are affected negatively by the appreciation of INR and positively with the depreciation of INR. Tax inefficiency can be another concern. International Mutual Funds are treated as debt funds while calculating the Capital Gains Tax.