International funds are equity funds that invest in stocks of companies listed outside of India. These funds help you invest in some of the biggest companies in the world. International Mutual Funds offer exposure to certain assets classes like foreign companies which otherwise may not be easily possible for investors through existing mutual fund schemes. Since the Indian market has a very low correlation with some of the overseas markets, having global exposure ensures healthy diversification and gives exposure to foreign currency as an asset class.

Why International Funds

• Get exposure to global leaders like Facebook and Google
• Good way to reduce portfolio risk as markets around the world rarely go down together
• Suitable for goals which are at least 5 years away

INTERNATIONAL  MUTUAL FUNDS CAN FOLLOW TWO WAYS TO INVEST

• Purchase stocks directly & build portfolio –  ICICI Prudential US Bluechip Equity Fund ( Create own portfolio )
• Invest in an existing global fund – PGIM India Global Equities Opportunities Fund ( Invest in PGIM Jennison Global Equity Opportunities Fund )

CATEGERISATION OF INTERNATIONAL MUTUAL FUNDS

1. Thematic International Mutual Funds –  Follow theme based investing approach and invest in foreign companies that belong to the concerned theme . Themes could be along the lines of Mining , Natural Resources or Real Estate for example DSP World Mining Fund invest in mining companies like Rio Tinto , BHP or BARRICK.  In a similar manner Aditya Birla Sun Life Global Real Estate Fund invest in Real Estate Companies in foreign .

2. Region or Country Specific Funds – These funds invest specific in particular region or country specific stock market . The AIM is to generate returns through available opportunities in the target market. Example- Motilal Oswal S&P 500 Index Fund invest in companies that are part of S&P 500 index or Greater China Equity Off-shore Fund which invests primarily in a diversified portfolio of companies incorporated or which have their registered office located in, or derive the predominant part of their economic activity from, a country in the Greater China region.

3. Global Markets – This funds invest in global and do not restrict themselves to A specific region or A country. If you invest in these funds then you get diversified portfolio with stocks from across the world. Example- ICICI Prudential Global Stable Equity Fund (FOF) or Sundaram Global Brand Fund

BENEFITS OF INTERNATIONAL MUTUAL FUNDS

• Diversification – When investors buy stocks for an international portfolio, they are also effectively buying the currencies in which the stocks are quoted.

Economies of different countries simultaneously go through different growth cycles which maybe unrelated but studies have indicated that correlation reduces in the long term. Thus when you invest in other economies through mutual funds you can manage risks better and support overall gains even if your primary market underperforms. This balance ensures your portfolio volatility is maintained at the right levels your overall returns are not impacted drastically when the Indian economy may not be doing so well but others could be. There have been periods when Indian Benchmark indices have significantly underperformed global indices like S&P 500. 

• Become owner of Big Global Businesses-  Example – Apple , Facebook , Google , Nike , Adidas , Coca Cola , Mc Donalds, Visa , P&G etc

• Currency Diversification- The Indian rupee has been depreciating over the last few years, there are various reasons for this depreciation—from political instability to rising inflation levels to weak fiscal policies. One can take advantage of this situation by investing in international funds. When an investment is made in international funds, investors get exposure in foreign currency through investing in rupees. Any appreciation in the value of the foreign currency or any depreciation in the home currency will increase the returns.

In year 2000 $ 1 = INR 45 which in 2020 was $1= INR 75

RISKS OF INTERNATIONAL MUTUAL FUNDS

1. Economic & Political Risk: As international funds invest in other countries or regions, the change in the economic or political condition of the country can impact the performance of the country and, subsequently, this can affect the fund’s performance.   

2. Currency Risk :  Exchange rate movements could either enhance or diminish the return of that security. Currency risk, or exchange rate risk, comes from the chance that exchange rate movements could negatively impact an investment’s total return.

KEY TAKEAWAYS

 An investment horizon of over 5 years or more is ideal in international mutual funds as it will flatten the risk of short term geopolitical events. It will also be beneficial from the perspective of taxation as these funds are taxed like debt funds and you can reap the benefit of indexation through long term capital gains tax.

Gold is a unique asset: highly liquid, yet scarce; it’s a luxury good as much as an investments Gold is no one’s liability and carries no counterparty risk. As such, it can play a fundamental role in an investment portfolio. 

Gold acts as a diversifier and a vehicle to mitigate losses in times of market stress. It can serve as a hedge against inflation and currency risk.

The combination of these factors means that adding gold to a portfolio can enhance risk-adjusted returns. 

But how much gold should investors add to achieve the maximum benefit? Portfolio allocation analysis indicates that investors who hold between 2% to 10% of their portfolio in gold can significantly improve performance.

Indians’ love for Gold jewellery is inevitable. But most investment managers argue that buying gold in form of jewellery should not be mistaken as investment. They say the costs such as the making charges which can go upto as high as 25% of the price and GST, are irrecoverable on resale.

Gold Exchange Traded Funds (ETFs) and Sovereign Gold Bond (SGB) , issued by the Government of India are the smart ways to invest in gold.

Gold Exchange Traded Funds

Gold ETFs are listed on the exchanges and invest in physical gold. Each unit of a Gold ETF represents 1/2 gram of 24 karat physical gold. Gold ETFs provide ample liquidity as these can be sold on exchanges anytime.

“Investors in Gold ETFs do not bear any making charges or premium. Also, they don’t have to worry about purity, storage and insurance of gold. Moreover, Gold ETFs are traded on the exchange at the prevailing market price of physical gold, thus investors can buy or sell holdings at close to the market price, without paying a premium on purchase or selling at a discount.

Sovereign Gold Bond

SGBs are government securities denominated in grams of gold. The Bond is issued by Reserve Bank on behalf of the GOI.. The Bonds are issued in denominations of one gram of gold. An individual can invest maximum for up to 4 kg of gold through SGBs, in a fiscal year. The Bonds bear fixed interest at the rate of 2.50 % per annum , payable semi-annually. SGBs assure market price of gold at the time of selling.

SGBs come with a tenor of 8 years. It allows early redemption only after the fifth year from the date of issue. The bond is tradable on exchanges, if held in Demat form. But low trade volumes can be a hindrance. It can also be transferred to any other eligible investor.

How are Gold ETFs and SGBs taxed?

Capital gains on goold ETFs are taxed at 20% after indexation if held for over three years.

Interest on the SGBs will be taxable. The capital gains tax arising on redemption of SGB to an individual has been exempted. The indexation benefits will be provided to long terms capital gains arising to any person on transfer of bond.

Don’t put all your eggs in one basket. We are sure you would have heard this saying multiple times. This is also one of the basic philosophies of personal finance. What it means is that when investing, you shouldn’t invest all your money in one asset class. But why is that and how should you decide where to allocate your money and how much? In this discussion we will talk about the principles of asset allocation, why it’s important, how you should decide what asset allocation works for you and why rebalancing is an extremely important component.

When you invest in one investment option or asset class, the risk you are taking is extremely high. So, to reduce the risk you need to diversify your investments by investing your money in different investment options and asset classes like real estate, gold, mutual funds, equities, and fixed deposits. This is what asset allocation is all about. Asset allocation helps investors reduce risk through diversification. Historically, the returns of stocks, bonds, and cash haven’t moved in unison. In other words, asset allocation matters a lot more than stock picking when it comes to reaching your financial goals.

Example:

To understand the importance of spreading out your investments across asset classes, let’s take the example of one asset class, real estate.

The real estate sector noticed a boom between the years 2010 and 2013, and people were being lured with expectations of 10-20% returns in a short period. But had you invested during that period, your returns today would have been in the range of -20%. That’s because the home rates have fallen by that much percentage in the last 6-7 years. In some cases, people even lost their entire money because some developers went bankrupt. 

This example implies that no one in this world can predict which asset class or investment option will do well in the future and which won’t. Hence to mitigate the risk, you must diversify your portfolio and invest your funds in different asset classes. 

How to decide your asset allocation:

So how should you decide your asset allocation? Well, one of the most important factors is your risk profile. Every individual’s risk profile is different and owing to this, the standard rule of asset allocation shouldn’t be used. 

Understanding your risk profile :

To understand your risk profile you need to understand three components that constitute your risk profile –  risk appetite, risk capacity, and risk tolerance. You might think of these terms as the same, but you must note that there is a difference between each of these. 

1.Risk appetite is how much risk you are willing to take 2.Risk Capacity is how much risk you can take. Although you might be willing to take the risk on your entire capital your current financial situation including liabilities, dependents, age, and salary might not allow you to do that. So you need to consider these before defining your risk capacity 3.Risk Tolerance is how much risk you can tolerate, psychologically, and mentally. For example, if you invest in stock markets, where there are  a lot of fluctuations, you must be mentally prepared to tolerate the risk.

Of these three components, risk tolerance is the most critical while determining your asset allocations. That’s because you might have a high-risk appetite and risk capacity but your risk tolerance will determine which asset class and investment options you will pick.  Let’s take an example. Suppose you are very hungry and feel you should eat a lot or you can eat a lot. But if you eat more than your capacity, your body won’t be able to tolerate it. So you need to have a balance. As you allocate assets on the basis of risk tolerance, you must consider personal factors like your monthly income, expenses, age, financial liabilities, your dependents in the family, etc. 

However, along with this, certain macroeconomic factors also play a vital role in how your funds may perform and may change your risk profile. Additionally, asset allocation must also depend on your short-term and long-term financial goals. As the macroeconomic factors fluctuate, you may change the proportion of allocation of your funds to various asset classes. For example, if you invest in fixed deposits currently, and you receive an interest rate of 5%-6%. Now, you should figure out that with lesser interest on your investments in FDs, your risk profile would change and hence, you should change your asset allocation by shifting your funds from one asset class to the other such that you can meet your financial goals in time.

I am happy I have equity in my portfolio- it’s up.

I am not so happy with bonds – Rates up

I am not happy with gold – price down due to custom tax cut.

I am happy overall – Asset Allocation.

Lack of knowledge about how to manage financial assets leads people to ask, “Why is personal finance important?” Personal financial skills are very important because without them, people usually spend their entire lives savings without knowing the future need and always in debt, never able to catch up and get ahead. If you don’t plan for your income, you will end up overspending or spending on unnecessary items. With a proper financial plan, you will be able to manage your income effectively. This way, you will spend on what is necessary and save or invest the rest. Being able to manage your income will help you to know which expenses to handle first and which ones come later. Also, you can effectively know how much is necessary for tax payments, savings, or clear your monthly bills.

Union Finance Minister Nirmala Sitharaman presented Union Budget 2021-22 in on 1^st Feb. While she made no changes to the income tax slabs, other announcements were done that can impact one’s personal finances.

Relaxation to NRI for Income of Retirement benefit account

In order to remove the genuine hardship faced by the NRIs in respect of their income accrued on foreign retirement benefit account due to a mismatch in taxation, Budget 2021 proposed to notify rules for aligning the taxation of income arising on foreign retirement benefit account.

 Taxation of Unit Linked Insurance Plan (ULIP)

If you were investing in ULIPs for investment purpose rather than protection goals, then the Budget 2021 has ensured your earnings from ULIPs will be subject to Capital Gains Tax from April 1, in case premium exceeds INR. 250,000 annually

Relaxation to Sr. Citizen above 75

In order to ease the compliance burden on senior citizen pensioners those are of 75 years of age or above, Budget 2021 proposed to exempt them from the requirement of filing an income tax return (ITR) if the full amount of tax payable has been deducted by the paying bank. This exemption is proposed to be made available to such senior citizens who have only interest income apart from the pension income.

Interest earned on annual Provident Fund contribution over INR 2.5 lakh to be taxable

The Union Budget 2021 has some bad news for high earners. the Budget proposes to tax interest earned on provident fund contribution above INR 2.5 lakh per year

Tax incentives for Affordable Housing

“This government sees housing for all and affordable housing as priority areas. In July 2019 they provided and additional deduction of interest amounting to INR 1.5 Lakh for loan taken to buy an affordable house. Finance Minister Nirmala Sitharaman propose to extend the eligibility of this condition by one more year to 31st March 2022The additional deduction of 1.5 lakh shall therefore be available for loans taken up to 31st March 2022, for the purchase of the affordable housing