Nowadays, you must be hearing people investing in international equities. Also, many advisors might be talking to you about investing in international markets and get some global exposure. You must be hearing terms like “overseas investments”, “international equity” and “Global Diversification”.
In the last year during the COVID-19 pandemic, the number of folios in mutual fund schemes that invest overseas has increased to 4.4 lakhs from 1.44 lakhs. AUM (Asset under management) also rose to Rs.6482 crores from Rs.2470 crores.
What exactly all this means? Let us find out this in detail.
Before moving on to whether we should be investing overseas or not, let us first understand why there is a so much hype about it. Following are some of the reasons:-
- Post the announcement of the enormous stimulus package in the US, interest in the US market increased.
- Companies whose major business is online is expected to do well during and post COVID- 19 pandemic. Most of these companies are based in US like Facebook, Amazon, Netflix, alphabet etc. These companies are expected to comfortably face even huge disruptions that are happening owing to on and off lockdown in different parts of the world.
- Looking at the advance technology and huge investments capabilities, it can be seen that developed economies like US is more likely to overcome the coronavirus pandemic sooner than developing economies like India.
If you are not a seasoned investor and find it difficult to understand international markets, the best way is to take mutual fund route. You can benefit by taking advantage of professional expertise of the fund manager in picking up specific stocks and also the market. Almost all the Asset Management companies offer international funds.
What are international Funds?
International funds are type of mutual funds where the investor’s pool of money is invested in international equity markets. One can either invest lump sum or through SIP as well. Investments done in these funds can be made in stocks of companies all over the world.
Taxation of these funds
It is crucial to understand the taxation aspect of these international funds while taking a decision to invest in them. For the purpose of taxation, the schemes are exactly the same as debt schemes. This means the investor will either have a short-term capital gain or long-term capital gain based on a holding period of 36 months. If an investor holds this fund for less than 36 months, it will be considered short-term and will be taxed at the slab rate applicable.
On the other hand, if the investor sells the investment after holding it for more than 36 months, it will be considered a long-term capital gain. This long-term capital gain will be taxed at the rate of 20% with indexation benefit.
There are certain domestic equity schemes offered by AMCs that have some exposure of 20% -30% in international equity. The advantage here is that you get some exposure to US markets and it is more tax-efficient than international funds as these are taxed as equity funds. This implies that long-term capital gains are taxed at 10% only if the gain exceeds 1 lakh and short-term capital gain is taxed at just 15%. Here, long-term and short-term will be decided based on a holding period of 12 months.
Getting global exposure has many benefits. One of the major ones is diversification of your portfolio not only in India but all over the world. It is always suggested to not park all your investments in one asset class. If we move one step ahead, you should also diversify your investments in each asset class as well. Investing in US and other countries will diversify your money in different economies. It protects your money and reduce risk to certain level.
Also, if you are looking to send your kids abroad for education, you can look at investing in international funds. This will help you to capitalize on dollar rates.
Related Article : Benefits of investing in global markets
Should you invest?
Now the main question arises, should you invest or not?
If you understand the international markets well, then only go ahead investing in international funds, otherwise it will do more harm than good. It is not recommended to invest major part of your portfolio globally. For balanced diversification and hedging purposes, limit your global exposure to 10%-15% of your entire portfolio.
It is further suggested to opt for schemes which focusses on US markets. It will be a good choice for Indian investors. If your risk appetite is high, you can also invest directly into US stocks instead of mutual funds.
Having said all this, it is always of utmost importance to understand the product where you are investing. Not only be aware of return potential but also don’t overlook risk associated with it.