Adding an international flavour to your portfolio

We live in a globalised world where technology has broken down most boundaries. Gone are the days when you had to place a trunk call and wait for hours just to talk to a relative who lived abroad. Today, all you need to do is click a few buttons on your phone or laptop and you have a clear connection. Not only that, we are also more aware of what is happening in the world around us. From US elections to European vacation destinations, you know it all. But, are you truly a global citizen? Maybe not. One important element might be missing. That element is global investments. You consume foreign products, you enjoy foreign music, and you probably also holiday in foreign locations. Now, it is time for you to benefit from foreign investments.

Previously, many people avoided investing in foreign countries as stock selection required a degree of local knowledge which was not easy to acquire. However, today, it has become easy to invest in foreign equities. All you need to do is invest in an international fund offered by domestic Asset Management Companies (AMCs).

So, what exactly are international funds? These funds are basically mutual fund schemes that invest in equities or fixed income securities of international markets. They can also invest in foreign mutual funds through the Fund of Fund (FoF) route. International mutual funds offer domestic investors an opportunity to participate in global themes, regions, or countries. For example, US technology stocks have been witnessing strong growth and are expected to continue on this trajectory. If you want to benefit from the growth in US technology stocks then you can simply invest in an international mutual fund that invests in US technology stocks. Similarly, you might be of the opinion that the Chinese economy is going to become stronger and the Chinese stock markets are likely to rally in response to this growth. To participate in this expected rally, you can choose to invest in an international fund that is focused on Chinese equities. There are so many opportunities to explore.

Benefits of investing in international mutual funds

Potential to enhance the risk-adjusted returns of the portfolio through diversification: Many of the factors that impact global equities are different from the factors that influence domestic equities. Further, because of a different macroeconomic, demand, and regulatory environment global companies can witness higher levels of growth compared to domestic companies. This enhances the return potential of your portfolio. From the perspective of risk, developed market stocks are generally more stable than emerging market stocks. As a result, these stocks generally do not witness very high price fluctuations. Both these factors together can improve the risk-adjusted returns of your portfolio.

Opportunity to participate in the potential growth of foreign companies: Inarguably, India is a market of opportunities and offers multiple avenues for wealth generation. However, international funds provide exposure to themes and opportunities that are currently not available in India but have the potential to witness substantial future growth. For example, a US technology fund could give you exposure to innovative US tech stocks that are expected to witness strong future growth. This kind of exposure would not be possible through a domestic fund.

Hedge against rupee depreciation risk: India is an emerging market and consequently its currency is weaker than leading global currencies like the US dollar or the Euro. Often, people who have cash outflows or liabilities in a foreign currency get impacted by rupee depreciation. Through international funds, a part of your portfolio can benefit from the strength of the foreign currency. As a result, foreign currency exposure gets hedged. Further, a depreciation in the INR enhances the returns generated in dollar terms as it increases the per unit value of the investment. Thus, international funds can potentially have two sources of returns – one, from the investment itself, and the other from the depreciation in the INR.

Clearly, international mutual funds offer several benefits. However, it is important for you to assess whether these funds are a good fit for you. You should consider investing in international mutual funds if:

• You want to diversify your investment portfolio through exposure to international equities
• You want to take advantage of the growth opportunities that are available globally
• You have some liabilities which are in a different currency and want to hedge that currency exposure
• You want to hedge your portfolio from weakness in the INR
• You are fine with the additional global, currency, and political risk that foreign investing can bring

One last thing to remember is that international mutual funds are taxed like debt mutual funds. Hence, if you hold your investment in an international mutual fund for more than 3 years, then the gains are classified as long-term and taxed at the rate of 20% after indexation, which takes into account the inflation during the holding period and raises the cost of acquisition accordingly.

Investing in international funds is no different from investing in domestic equity or debt funds. You can do so directly with the Asset Management Company (AMC), through an investment adviser or through many of the available online platforms.  You can even start a systematic investment plan (SIP) in an international mutual fund with as low as Rs 500.

It has now become easy to invest in international mutual funds and there is no reason why you should not add an international flavour to your investment portfolio.

An investor education initiative by Edelweiss Mutual Fund

All Mutual Fund Investors have to go through a onetime KYC process. Investor should deal only with Registered Mutual Fund (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit - https://www.edelweissmf.com/kyc-norms

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.