What are International Mutual Funds
With globalisation, geographical boundaries have diminished, connecting people more than ever. Investors can invest in their home countries and also in companies abroad to maximise their profits. One such way to globally expand your investments is through international mutual funds. As the name implies, international mutual funds are funds invested in companies overseas. Foreign funds are riskier than domestic investments but offer more opportunities to earn higher returns.
How do international mutual funds work?
International mutual funds work like regular mutual funds. The investments are made in the Indian rupee. A fund manager invests your money in foreign companies listed on foreign exchanges. The fund manager either builds an investor’s portfolio after buying companies’ stocks or invests in a global fund. The categories of international mutual funds are as follows:
- Country funds
Country funds are foreign funds that invest in a particular country. With no need for extensive research about several countries, you can take advantage of a single country’s economy and maximise returns.
- Regional funds
Regional international funds invest in a world’s particular region like South Asia, West Asia, etc. You can select one or multiple regions based on your research.
- Global funds
Global and international funds are not similar despite having synonymous names. While global funds invest in companies over the world, including the country where you live, international funds invest globally except in your country.
- Global sector funds
Global sector funds are foreign funds that focus on specific sectors of the world, such as technology, real estate, automobiles, etc.
- International commodity funds
International commodity funds focus on specific industrial commodities or precious materials. Examples of such funds include international mineral funds or gold funds.
Advantages of international mutual funds
Some of the advantages of foreign funds include:
- Global market exposure: Foreign mutual funds offer global exposure allowing you to tap global markets. You can invest in countries with a booming economy if your native country is struggling with economic downfall.
- Portfolio diversification: Investors aim for portfolio diversification to minimise risks. International funds allow you to make investments in different countries, diversifying the risk over multiple industries, countries or regions.
- Professional management: Investing in overseas mutual funds is hassle-free as they are managed by professional fund managers. Even if you lack knowledge of the international market, fund managers allow you to manage your portfolio efficiently.
- Higher returns: International funds offer you the opportunity of global market ownership. You can invest in renowned global companies, such as Apple, Amazon, Nike, etc., to earn higher returns.
Disadvantages of international mutual funds
Like other investments, foreign mutual funds also have their pros and cons. So, you must be aware of the following disadvantages of foreign mutual funds to make an informed decision:
- Greater risk: Foreign funds involve the risk of currency rate fluctuations which makes them riskier than domestic investments. For example, if you invest in a US company and the rupee value rises, or the dollar depreciates, the returns will be less.
- Constant tracking: International mutual funds need constant tracking of the social and political environment that impacts a country’s economy.
How are international mutual funds taxed?
International funds invest majorly in equity and other related instruments. However, the investment is not considered an equity fund because it is not carried out in domestic companies. So, foreign funds are treated as debt funds for taxation purposes. Thus, the rules of long-term capital gains tax and short-term capital gains tax are applied in the case of overseas funds. It is considered STCG if you redeem the international investment within three years. The returns are added to your income, and you are taxed according to the tax bracket. On the other hand, a LTCG tax is levied if you invest for more than three years.
With international mutual funds, you can invest in different countries and expand your portfolio to overseas markets. With professional management of investment, the funds offer you the chance to earn higher returns. But international mutual funds come with higher risks associated with the social, political and economic environment of different countries. So, before investing in foreign funds, you must evaluate your short-term and long-term financial aims and your risk appetite. You should also know about the expense ratio of your investment portfolio, which includes the annual payments related to the fund’s administration.
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