All you need to know about international investing

When it comes to investing, most investors have at some point of time or another suffered from the Fear of Missing Out (FOMO). Fear that you might miss on investing in the next multi-bagger or fear that you might not be looking at the best investment opportunities. This becomes especially true when you look at international markets. For example, back in 2015, European stocks did very well and were declared the world's top performers. The same year, there were also other global markets that had performed exceedingly well. On the other hand, 2015 was not an easy year for Indian markets and Indian investors. At that time, many of you would have looked towards foreign shores and felt that some sort of investments in foreign markets would have been good.

Why foreign flavours can be good for your portfolio

There are many reasons why you should consider adding foreign investments to your portfolio.

• First, as highlighted above, foreign markets generally do not mirror domestic markets. Every market gets impacted by a number of factors that can make it go up or down. The interesting thing is that these factors are not always the same across countries or don't always move in the same direction. As a result, stock indices of different countries do not deliver the same performance during a certain period of time. So, if you add international investments to your portfolio then there are chances that when domestic markets are not performing well, you will be able to reduce your losses through your investments in international markets.
• Second, international markets offer multiple growth opportunities that might not be available in the Indian markets. For example, companies like Facebook, Apple, and Tesla are unique and have delivered excellent growth and returns for their investors. However, the stocks of these companies are not listed on any of the Indian stock exchanges. Thus, if you want to invest in strong global companies that can potentially generate good long-term returns, then international investing is the best way to follow. Simply put, adding international investments can help you potentially improve the returns on your portfolio.
• Third, it helps you reduce the impact of a falling rupee on any foreign liability that you may currently have or anticipate in the future. Let's understand this better with an example. Assume your child is studying in a foreign university for which you pay an annual fee of USD 1,00,000. At an exchange rate of INR 70 per dollar, you will need INR 70 lakh to pay the fee. Now, if the rupee falls in value and goes down to INR 72 per dollar, then you will need INR 72 lakh to pay the same annual fee. A fall in the value of the rupee increased your payout by INR 2 lakh.

Now, assume that you have made a foreign investment which is valued at USD 10,000. When you convert this into INR it is equal to INR 7 lakh (USD 10,000 x INR 70).

When the rupee value falls to INR 72, the value of your investment increases to:

USD 10,000 x INR 72 = INR 7.2 lakh

This means that a fall in the value of the rupee increased the value of your investment by INR 20,000.

Let's see what happened here:

Therefore, by investing in foreign equities, you reduce the loss due to a fall in the rupee to INR 1.8 lakh(INR 2,00,000 – INR 20,000)

The best way to invest in foreign markets

Clearly, you can gain in several ways by investing in foreign markets. The next step to consider is how you are going to invest in foreign markets. Generally, there are two ways to do this. You can either invest directly – this would mean that you need to do the relevant research, choose the right markets, then choose the right investments, and make yourself aware of all the rules and regulations in that particular market. If this sounds like a really challenging task then you need not lose hope. You can simply invest in foreign markets throughinternational mutual funds. These are domestic mutual funds that invest in foreign markets. They offer a wide choice in terms of giving you an opportunity to invest across geographies like US, China or Europe or different themes like US technology, mining, etc. The best thing is that the investing process is the same as investing in domestic mutual funds. Further, you can also start aSystematic Investment Plan (SIP)in an international mutual fund of your choice. Through an SIP, you can invest a fixed amount of money in the fund at time intervals, like fortnightly, monthly or quarterly, that suit you best.

Now, the next thing to consider is, 'when to invest?” Like they say, 'time in the markets is more important than 'timing the market'. This is true for all investments, including investments in international mutual funds. What you really need to look at is your risk profile – this is important since international mutual funds are high-risk in nature. Additionally, they are best suited for long-term investors who have an investment time-frame of greater than 5 to 7 years. So, rather than looking for the 'right' time to invest, you should see if international mutual funds are a 'right-fit' for your portfolio. If you think that you can gain from the benefits that international mutual funds offer, i.e., diversification, potentially better returns, and protection against a falling rupee, then you should consider investing in them.

Taxation of international mutual 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.

Foreign flavours always sound exotic. While some flavours can improve your experience, others can leave a bad taste. The key is to understand the foreign investments that will fit well with your overall asset allocation strategy.

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