How to choose an international mutual fund in 2021

We live in a time when access to information and people across the globe is simple and quick. Similarly, as an investor, you must be aware of the benefits of international investments and the value that they can add to your portfolio. In addition to diversification and portfolio risk mitigation, they also give you an opportunity to enhance the risk-adjusted returns of your portfolio. While there are a couple of ways by which you can invest internationally, the easiest is probably through international mutual funds. Several big Asset Management Companies (AMCs) have an international mutual fund offering. They invest in different markets and themes and follow different approaches to investing. Thus, it becomes important that you choose the international funds that best meets your requirements. Here is a list of factors that you must consider before choosing an international mutual fund.

• It’s a world of opportunities: We often tend to invest in investments that are familiar to us. Thus, when it comes to choosing international mutual funds, many of you would simply invest in a fund that offers exposure to Facebook, Amazon, Apple, Netflix, and Google (FAANG). However, it is important to know that there are international investment opportunities beyond FAANG. These are just some investments that might be the part of a US fund. However, you need not limit yourself to international mutual funds that invest only in the US. You can choose to invest in schemes that focus on other leading markets like Europe, Brazil, and China or even those that invest in commodities like gold.
• Active or Passive: Actively managed funds are those in which the fund manager tries to buy and sell stocks in an attempt to generate better returns than the benchmark index. Passively managed funds are those in which the fund manager buys the same securities as those in the benchmark index and tries to replicate the benchmark returns. If you are looking for passive options then you can invest in index funds or Exchange Traded Funds (ETFs) that track stock indices in international markets. Similarly, there are options to invest in active international funds as well. However, considering that developed markets are more efficient in terms of information symmetry, it is generally challenging to outperform the benchmark index consistently over a period of time. On the other hand, active funds can potentially generate good returns in emerging markets.
• Diversification: Inarguably, one of the main benefits of investing in international mutual funds is an opportunity to improve portfolio returns through exposure to investment themes that are not available in the domestic market. However, another equally important benefit is diversification. Generally, most economies are not perfectly correlated. This means that they all do not grow or shrink at the same time. Hence, it is important to invest in international markets and themes that are not highly correlated with your existing portfolio. This will ensure that when your domestic investments are witnessing low to negative returns, your international investments can add some stability or even generate positive returns. A well-diversified portfolio can help improve a portfolio’s risk-adjusted returns.
• Currency factor: When you invest in an international mutual fund you are not only investing in a foreign market you are also indirectly investing in a foreign currency. The strength /weakness of the foreign currency can have a significant impact on your returns from an international investment.

For example, assume you bought 100 units of a US based fund for Rs. 1,00,000 when the USD/INR rate was 70. In dollar terms, the value of this investment is approximately USD 1428. Now, after one year, this investment grows to USD 1500. The returns generated in USD terms is approximately 5%. You need to convert your Dollar holding into INR. The USD/INR rate at this time is 73. Thus, the value of your investment in INR terms would be Rs. 1,09,500. Thus, in INR terms, your returns would be 9.5%. Clearly, a depreciating INR had a positive impact on the returns from your international investments. The opposite would be true in case the INR had appreciated.

• Taxation on international funds: The tax treatment of international funds is the same as the tax treatment of debt mutual funds. If the investment is redeemed within three years of purchase then the gains are added to your income and taxed as per the applicable income tax slab. However, if you redeem the investments after three years, then the returns are taxed at 20% with indexation benefit.

Any investment that you make should adhere to your asset allocation strategy and meet your risk-return requirements. This means that when you are looking to invest in an international mutual fund then you must consider the above factors and choose a fund that fits well with your asset allocation strategy and overall portfolio goals.

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