/Everybody is recommending International funds. Should you invest?

Everybody is recommending International funds. Should you invest?

Everyone is in love with international funds these days. Fund managers and advisors are speaking breathlessly about them. Private wealth managers are also recommending these overseas funds to their clients. Suddenly, geographical diversification is becoming very vogue in mutual fund circles. Is it necessary for individual investors who invest a modest sum regularly to diversify into these schemes?

For the newcomers, international funds or overseas funds, as their name suggests, invest in the stock markets abroad. There are international funds dedicated to the US market, Europe, Brazil, China, Asian markets, emerging markets, among others. There are also international schemes focused on agriculture, mining, technology sectors. Also, some of these schemes follow a passive investment strategy like investing in an index.

Why is it suddenly becoming so popular? One, the humongous stimulus package announced in the US got everyone interested in the US market. Also, many investment pundits believe that some of the companies in the US – for example, Facebook, Amazon, Netflix, alphabet, etc – are uniquely placed to face huge disruptions that are happening or likely to happen in the global economy in the post- Covid-19 pandemic world. They also argue that the US market allows you to bet on another large economy that is likely to overcome the virus threat sooner than India.

“We need to understand the concept of bubble in the market. Whatever performs well, we tend to be inclined towards it. This doesn’t make it necessary for the investors, especially retail investors. International funds have performed better than the other segments in Indian mutual funds. However, retail investors need to be cautious. These schemes are risky. HNIs can sure go for a 5% allocation,” says Raj Talati, Financial Planner and founder, ABM Investment, a financial planning firm based in Vadodara.

But the big question is: should an investor, who invests, say, Rs 10,000 or Rs 15,000 diversify into overseas funds? Won’t s/he be diluting the investment focus?

“If you ‘need’ foreign currency for your long term goals, you can invest small amounts for at least 10 years. What do I mean by need? If you have plans of sending your kids to a college abroad, these investments may come handy because you will capitalise on dollar rates. But, if this goal is less than 8 years away, don’t take the risk,” says Raj Talati.

Puneet Oberoi, Founder, Excellent Investment Advisors, says investors should weigh their financial needs. “If you need gold in the long term, diversify in gold funds rather than in international funds. Don’t block your money in too many diversifying schemes,” says Puneet Oberoi.

Okay, so if it is a great option for some investors, how should one proceed? It is very important as one is spoilt for choices. If you have a slightly large portfolio and you want to bet on international companies, mutual fund advisors ask investors to choose the US-specific funds.

“International fund category is a highly diverse bucket. You will find commodity funds, agriculture funds and what not in the list of schemes. However, it is always better to choose a diversified scheme. Preferably, a US-specific scheme is good for Indian mutual fund investors. Betting on stronger economies is the safest and best way to approach international investing,” says Puneet Oberoi.

Should one go for a broader index? Or should you go for the technology sector since all the talk is about the potential of the sector to survive disruptions?

“International funds are risky, sectoral exposure is riskier. Retail investors shouldn’t expose themselves to such high risk. If you are investing, invest in the broader index. Every market comes back to its mean and investor should be prepared for this to happen in the US market as well,” says Raj Talati.

However, the tax treatment of international funds should be kept in mind while choosing them. These schemes are treated like debt mutual funds for the purpose of taxation. That means, if you sell them before three years, the returns would be added to your income and taxed as per the applicable income tax slab applicable to you. If you sell the investments after three years, returns would be taxed at 20% with indexation benefit.

Does this give domestic schemes like PPFAS Long Term Equity Fund, Axis Growth Opportunities Fund,
Kotak Pioneer Fund, etc, that invest around 309% of their corpus in US stocks. These schemes are treated as equity schemes for taxation as they invest 65% of their corpus in Indian equities. That means, if you sell your investments after a year, you need to pay only 10% long-term capital gains tax on your returns. Even the short-term capital gains tax is only 15%.

“If you are a retail investor focusing on returns, go for the schemes that are a mix of domestic and international stocks, like PPFASLTE. It will give you better taxation. But if you are an investor looking for pure diversification or want money in dollars or you are an HNI, then a pure international fund is a better choice,” says Puneet Oberoi.

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