What are International Mutual Funds? Benefits & Types

International funds, also known as foreign funds, offer investors the opportunity to tap into growth potential beyond domestic boundaries. These funds pool money from group investors with a shared objective of investing in stocks and securities from various countries, providing a diversified portfolio that spans international markets. Now that you know what international mutual funds are, let’s discuss the ins and outs of this fund in detail.

Types of International Funds

The four common types of international stock mutual funds are:

• Global Funds

Global funds allow you to invest in companies across the world, including your home country. That means if you are based in India, your global fund may hold both Indian stocks and international ones like Apple or Nestlé. They are perfect for those who want global reach without giving up local exposure.

• Region-Specific Funds

As the name implies, these funds focus on a particular geographic region. For example, if you believe countries like Japan or South Korea are expected to grow faster than other developing countries, you may pick an Asia-Pacific fund.

• Country-Specific Funds

Country-specific funds invest in just one country’s market, like the US, China, or Japan. These funds are useful if you believe one country’s economy will perform better than others. However, this can be risky due to a lack of diversification.

• Global Sector Funds

These funds target a specific sector on a global level, such as healthcare, technology, or energy. Let’s say you want exposure to the global tech sector; this fund might invest in Apple (US), Samsung (Korea), and SAP (Germany). You get both sector focus and global spread, but returns may depend heavily on that sector’s performance.

Advantages of International Mutual Funds

Investing in international mutual funds offers the following perks. 

• Currency Benefits 

If the Indian Rupee depreciates against the US Dollar or Euro, your international fund value may go up even if the actual stock prices don’t rise. This currency advantage can add an extra layer of returns, especially when investing in developed markets with strong currencies.

• Economic Cycle Benefits 

Different countries go through different economic phases at different times. When India is in a slowdown, the US or European markets might be booming. Investing internationally lets you benefit from favourable economic cycles across the world.

• Access to Niche Sectors 

You can invest in sectors not yet well-developed in India, like global robotics, aerospace, biotech, or electric vehicles. These funds allow you to ride trends and technologies shaping the future, but may take years to mature in Indian markets.

• Spreading Political Risk

Political instability in India can impact domestic markets. But if you hold international funds, your exposure is not limited to Indian politics. This buffer helps reduce the chances of large portfolio drops due to domestic political or regulatory turmoil.

Factors to Consider Before Investing in International Mutual Funds in India

Before you invest in international funds, keep a close eye on the following parameters.

• Currency Exchange Risk

When you invest in international mutual funds, your money is converted from Indian Rupees (INR) to a foreign currency like the US Dollar. If the Rupee weakens, your returns may look higher, but your profits can shrink if it strengthens. You must factor in currency fluctuations as they directly impact your gains or losses.

• Economic Conditions

You are investing not just in a company overseas but in its country’s economy too. Trade wars, political instability, or economic slowdowns can heavily impact your fund’s performance. Always keep an eye on global news and events that may affect the regions your fund is investing in.

• Market Correlation

One reason to invest internationally is diversification. But if the international market you are investing in is highly correlated with Indian markets, you may not achieve the desired diversification. Always look for countries or sectors that move independently of the Indian economy to spread your risk truly.

• Tracking Error

Tracking error is a key metric if you are investing in an international index fund or ETF. It shows how closely the fund mirrors the index it’s meant to track. A higher tracking error indicates poor management or costs eating into returns. 

• Tax Implications

International mutual funds in India are taxed as debt funds, meaning gains are taxed based on the investor’s income tax slab. Previously, long-term capital gains (held over three years) were taxed at 20% with indexation or 10% without indexation. However, since April 1, 2023, all short-term and long-term gains are taxed at the investor’s applicable slab rate, eliminating indexation benefits. This change impacts funds with less than 35% exposure to Indian equities. 

Who Can Start Investing in International Mutual Funds?

Investing in international mutual funds is ideal for the following types of investors.

• Individual Investors

Any individual investor who meets the minimum investment requirements and is looking for diversification beyond the domestic market can invest in international mutual funds. 

• Institutional Investors

Entities such as pension funds, insurance companies, and corporate treasuries can consider investing in international mutual funds to diversify their holdings and spread risk.

• Long-Term Investors

Those with a long-term investment perspective can leverage international mutual funds to benefit from growth in global markets over time.

Conclusion

Investing in international funds rewards you with portfolio diversification. It provides access to global growth opportunities while offering a hedge against domestic market risks. However, before committing your capital, evaluate the currency risks, economic conditions, tracking error, and tax implications.

If you want to start your investment journey through international funds, consider opening a 3-in-1 account first.