Most retail investors in India invest only in domestic equity, hybrid or debt funds. However, interest in international investments has been growing in the recent past. As per AMFI data, total AUM in Fund-of-Funds Overseas was only Rs 2,734 Crores as on 31st March 2020. In the last one year ending 31st March 2021, AUM in Fund-of-Funds Overseas rose to Rs 12,408 Crores, almost a five-fold jump in assets (Source: AMFI, as on 31st March 2021). In this blog post, we will discuss why you should have international investments in your MF Portfolio.
Benefits of international diversification
Risks of international investments
While international investments have its advantages, investors must also understand the risk factors so that they can make informed investment decisions.
- Country risk: Just like domestic equities carry country risk, equities of a foreign country also carry country risks specific to that country. Risks in emerging markets are usually higher than developed markets. Investors must take into cognizance the risk factors and build their equity portfolio comprising of domestic and international equities according to their risk appetite.
- Currency risk: Currency risk can work both ways. While international investments can give higher returns if the domestic currency (INR) depreciates against the foreign currency (e.g. USD), the opposite effect will be seen, if the domestic currency appreciates against the foreign currency. You should understand currency risks and invest according to your investment needs and risk appetite.
- Knowledge of international markets: International investments require knowledge of international markets and themes / sectors which may not be there in India. Even domestic fund managers may not have the skills required to invest in international equities. Investors may consider availing the expertise of global asset managers, who have local market presence and knowledge of investing in international markets. Investors should also understand the product they are investing in and consult with their financial advisors.
How to invest in international equities
Mutual funds offer solutions for investors who want exposure to international equities without having to go through a foreign broker. There are Exchange Traded Funds (ETFs) which invest in international equities, however, the more popular solution, which also provides wider choice of investments, is Mutual Fund Fund-of-Funds investing in international equities. You should consult with your financial advisors to know more about such funds.
There are several factors to consider in international investments:-
- Asset allocation: Investors can consider international equity as an asset class along with domestic equity, debt and gold. Asset allocation should be done according to the investor’s risk appetite and financial needs.
- Taxation: Unlike domestic equity funds, foreign funds (Fund-of-Funds) are taxed as debt funds. Short term capital gains (investing holding period of less than 3 years) are taxed as per the income tax rate of the investors and Long-term capital gains are taxed at 20% after allowing for indexation benefits. You should take taxation into consideration to make informed investment decisions.
- Track record of fund manager: As mentioned earlier, international investments require considerable expertise. Most international funds are structured as Fund-of-Funds. Investors should check the long term performance track record of the underlying / feeder fund. You can find performance related information of the underlying / feeder fund in the Scheme Information Document.
Issued as an investor education initiative by HSBC Mutual Fund.
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.