How to Invest in International Mutual Funds?

Key Takeaways

• Global Diversification: When you invest internationally, it lets you hedge against domestic market downturns and tap into the growth of global tech giants and emerging economies.
• Investment Route: Being an Indian investor, you can access global markets easily through Fund of Funds (FoFs) or feeder funds managed by domestic asset management companies.
• Protection against Rupee Depreciation: On investing in international funds, it provides a natural hedge against the depreciation of the Indian Rupee (INR) against stronger currencies like the US Dollar (USD).
• Taxation Updates: International funds are taxed based on holding periods, with long-term capital gains (LTCG) taxed at 12.5% for units held over 24 months.
• Regulatory Limits: Research thoroughly on aggregate regulatory limits set by SEBI/RBI on overseas investments, which sometimes temporarily halt new lump-sum additions.

Introduction

In today’s interconnected world, are you still limiting your financial portfolio to a single country? At least now, be aware that you are missing out on incredible growth opportunities happening globally. If you think about the products and services you use daily, you can find that be it smartphones and streaming services or global e-commerce platforms, most of these companies are headquartered outside India.

By learning how to invest in international mutual funds, you can comfortably own a piece of these international conglomerates right from your home in India. International mutual funds are investment schemes that invest in stocks of companies listed outside India.

For a long time, geographical boundaries kept Indian retail investors from participating in global stock rallies. However, the modern financial landscape makes international investing as seamless as buying a domestic stock or mutual fund. This guide covers everything about the benefits, the mechanics, the risks, and the step-by-step process of global investing.

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Top 3 Reasons To Diversify Internationally

Before going deep into the technical steps, it is utmost important to understand why allocating a portion of your portfolio to global markets is a smart financial move.

1. Geographical Diversification

When the Indian stock market goes through a correction phase, other global markets might be performing exceptionally well. Thus, when you spread your investments across different economies, it comes with a great advantage. It ensures that your entire net worth isn’t vulnerable to a single country’s economic, political, or regulatory risks.

2. Access to Global Innovation

India has a thriving economic ecosystem. However, in the case of certain sectors like cutting-edge artificial intelligence, advanced semiconductor manufacturing, innovative biotechnology, and massive social media conglomerates, they are predominantly led by US, European, or Asian giants. International mutual funds grant you instant entry into these highly specialized sectors.

3. Currency Depreciation Advantage

Historically, the Indian Rupee (INR) has depreciated against the US Dollar (USD) by a few percentage points on an average annual basis. For the unknown, when you invest in foreign markets, your investment is made in foreign currency. Even if the underlying stock price remains flat, an increase in the value of the foreign currency relative to the rupee boosts your final returns in INR terms.

Types of International Mutual Funds Available in India

When looking at how to invest in international mutual funds, you will find that these funds are generally categorized by geography or sector. Once you understand these categories thoroughly, it becomes pretty easy to align your investments with your personal risk appetite.

More about How International Mutual Funds Work

Most international mutual funds operating in India work in such a way that they utilize an indirect route known as a Fund of Funds (FoF) or a Feeder Fund structure.

In this system, an Indian Asset Management Company, popularly known as an AMC launches a domestic scheme i.e. the feeder fund. When you invest your money in INR, the Indian AMC pools these funds, converts them into foreign currency, and invests them directly into an existing international mutual fund (the master fund) registered abroad. The master fund manager then deploys that capital directly into global stock markets.

This structure is highly beneficial for retail investors as it gets rid of the operational hassles of setting up foreign trading accounts, executing direct currency conversions, or dealing with foreign brokerage platforms.

5 Steps to Invest in International Mutual Funds

With the advent of digital investment platforms, the process of investing in international mutual funds has become far simpler. The step-by-step process to get started is as below:

1st Step: Complete Your KYC (Know Your Customer)

For your information, before making any mutual fund investment in India, your KYC process must be fully updated. To complete this process, you will need standard documents including your PAN card, Aadhaar card, a valid passport or driving license as proof of address, and your bank account details. However, there’s absolutely no need to worry as most modern investment platforms let you complete this process digitally via video KYC in just a matter of minutes.

2nd Step: Choose a Reliable Investment Platform

You do not need a specialized international broker to buy these funds. You can invest directly through the website or mobile application of any Indian AMC offering global funds, or use any popular domestic mutual fund investment platform or mobile app.

3rd Step: Research and Select the Right Scheme

To choose the right scheme that best suits you, analyze the historical performance, expense ratio, fund manager track record, and the underlying assets of the international fund. Also, decide whether you want a broad-market index fund such as the one tracking the S&P 500 or Nasdaq 100 or an actively managed thematic global fund.

4th Step: Choose Between SIP and Lump Sum

Do you want to invest a lump-sum amount in one shot or set up a Systematic Investment Plan (SIP)?. Decide on that. When it comes to international investing, a SIP is highly recommended. The simple reason is that it averages out both stock market volatility and currency exchange rate fluctuations over time.

5th Step: Authorize and Monitor

Link your bank account, set up an auto-debit mandate if you are doing a SIP, and finalize your purchase. Once the processing is over, within a few business days, the units will reflect in your mutual fund account or demat statement.

Important Regulatory and Taxation Rules to Remember

Be well aware of the rules around international investing as this avoids regulatory surprises or unexpected tax liabilities.

The Liberalised Remittance Scheme (LRS) and Industry Caps

The Reserve Bank of India (RBI) allows resident individuals to remit up to USD 250,000 per financial year under the LRS for permitted transactions. This includes foreign investments as well. However, when you invest via the FoF route of an Indian mutual fund, you don’t directly utilize your personal LRS limit. Instead, the mutual fund industry as a whole operates under an aggregate cap for overseas investments.Due to these industry-wide caps, Indian regulators occasionally restrict AMCs from accepting fresh lump-sum investments into international funds. It is always suggested to check if your chosen fund is actively accepting fresh investments before planning a deployment. Please be aware that due to The Reserve Bank of India setting an overall industry-wide limit of $7billion for overseas investments, at present investors are facing restrictions.

Taxation on Capital Gains

The tax rules for mutual funds holding international assets have seen significant revisions. Once you understand the exact tax structure, it helps you calculate your net returns accurately:

• Short-Term Capital Gains (STCG): When you redeem your international mutual fund units within 24 months of purchase, the gains are treated as short-term capital gains. These gains are added directly to your taxable income and taxed according to your applicable personal income tax slab rate.
• Long-Term Capital Gains (LTCG): When you hold your investment for more than 24 months, the profits are treated as long-term capital gains. These long-term profits are taxed at a flat rate of 12.5% without indexation benefits.

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4 Main Risks of Global Investing

Though learning how to invest in international mutual funds paves the way for brilliant opportunities, as an investor, you must also remain aware of the potential risks involved:

• Currency Volatility: As you know by now, currency depreciation can work in your favor. However, a sudden or sustained strengthening of the Indian Rupee against the foreign currency can eat into your investment returns.
• Geopolitical Risks: Trade wars, political instability, or sudden changes in foreign government regulations can make a major impact on the companies your fund invests in.
• Higher Costs: Due to the dual-layered management structure i.e. the Indian feeder fund plus the international master fund, the expense ratios of international mutual funds can sometimes be slightly higher than standard domestic equity funds.
• Lack of Local Familiarity: Unlike the local brands you see around you every day, it requires more effort to track economic developments, corporate governance standards, and market updates for foreign companies.

Conclusion

Diversifying portfolio internationally is not an exclusive luxury reserved for high-net-worth individuals any longer. You should gain proper knowledge on how to invest in international mutual funds. It gives you a highly accessible, compliant, and cost-effective mechanism to grow your wealth with global corporate growth. To add on, it protects your hard-earned money against local economic slumps. This is done while capitalizing on generational technology and economic trends worldwide.

On approaching financial planners, they often suggest allocating around 10% to 15% of your overall equity portfolio to international assets. The best approach would be to start small and opt for the systematic investment route to fight market and currency fluctuations. Also make sure that you maintain a long-term investment horizon of at least 5 to 7 years. This will help you reap the true benefits of international diversification.