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.