International Mutual Funds: Meaning, Types, Benefit

Diversifying one's investment portfolio across geographical regions is a prudent strategy that can yield substantial rewards. While investing in domestic companies through equity mutual funds is a well-trodden path, venturing into international markets opens up a world of opportunities for savvy investors. One avenue for achieving this is through international mutual funds, which offer exposure to companies not listed in India.

So, in this chapter, you will learn how to invest internationally using mutual funds.

What Are International Mutual Funds?

International mutual funds are similar to thematic funds, adhering to the Securities and Exchange Board of India's (SEBI) regulations, which mandate that at least 80% of the fund's assets be invested in a particular theme or sector. In the case of international funds, the primary focus is on equity and equity-linked holdings of foreign companies or other international assets. 

To better understand the diverse range of options available to Indian investors, it is helpful to classify international funds based on their investment approach, geographic focus, and investing style.

Types of International Funds

• Thematic International Funds:

The investments under such funds are theme-based, similar to their peers in the home country. A good example here is an international healthcare fund, which would invest in worldwide pharmaceutical, biotechnology, and medical device companies, which is a replication of what a domestic thematic fund specialising in the healthcare sector does.

• Region or Country-Specific Funds:

As the name implies, these funds are focused on the equity markets of a particular region or country. For example, Motilal Oswal Nasdaq 100 Fund Fund invests primarily in companies listed in Nasdaq-100 via the Motilal Oswal Nasdaq 100 ETF and makes most of its investments in US market opportunities.

• Global Markets Funds:

Unlike region-specific or country-specific funds, these funds invest worldwide, spreading their investments across companies from different countries and sectors. The ICICI Prudential Global Advantage Fund represents the strategy well. This fund invests in global giants worldwide and across industries to provide diversification benefits.

Benefits of Investing in Global Funds

Investing in international funds offers several compelling advantages, chief among them:

• Geographical Diversification:

Every economy of any point works differently. Investors can also take advantage of opportunities in economies that are performing well while hedging against risks in economies that are performing poorly. These investments include SBI International Access - US Equity FoF and ICICI Pru US Bluechip Equity fund, which offer Indian investors a straightforward way of investing in the largest stock market in the world, the United States.

• Ownership of Global Market Leaders:

The international funds enable clients to own the world’s most famous and iconic brands, including Apple, Microsoft, Amazon, Google, Netflix, Nike, Starbucks, and Coca-Cola. Through international funds, investment in these companies allows investors to share their profits and consume their products and services. Hence, certain investments like Mirae Asset NYSE FANG+ ETF and Motilal Oswal Nasdaq 100 Fund of Fund enable Indian investors to join these mega-cap tech giants in the US.

• Currency Diversification:

The US dollar is now worth ₹60, more than ten years ago. Investing overseas funds leads to foreign currency exposure and serves as a hedge against rupee depreciation. An appreciation of the foreign currency or depreciation of the home currency can enhance the return of international fund investors.

The Working of International Mutual Funds

Investing in international mutual funds is the same as in any other equity mutual fund. The investors invest in rupees but receive units of the fund in return. The money manager then places the accumulated funds in the shares of companies quoted on exchanges outside India.

Two primary approaches fund managers employ:

• Buy foreign stocks directly, constructing a portfolio that fits the fund’s investment approach.
• Investing in an existing global fund with a ready-made portfolio of foreign company stocks, in the fund-of-funds approach, as seen in the Motilal Oswal Nasdaq 100 FOF and ICICI Pru US Bluechip Equity Fund.

Irrespective of the style, international mutual funds are managed by Indian mutual fund companies and controlled by SEBI. These funds' net asset values (NAVs) are computed and published daily in rupee terms.

Investment Destinations and Their Significance

International mutual funds in India offer investors diverse investment destinations, including countries like Japan, China, ASEAN nations, Europe, Brazil, and the United States. Funds are mandated to invest globally for those seeking a broader geographical reach.

The selection of a destination in which to invest is essential because it sets the benchmark index that the fund intends to outperform. The variance comes from each benchmark index's price-to-earnings (P/E) ratio and potential for future returns, leading to a significant deviation between the performances of various international funds.

The table below shows the trailing and forward P/E ratios of various indices commonly used as benchmarks by different international funds:

Benchmark	Trailing P/E Ratio	Forward P/E Ratio
MSCI World Index	18.18	16.09
MSCI All-Country World Index	17.37	15.52
S&P Global 1200	18.54	15.91
MSCI Emerging Markets Index	12.83	12.1
MSCI Europe Index	14.29	12.64
MSCI ASEAN Index	18.43	NA
MSCI Asia (Ex-Japan) Index	14.95	13.23
MSCI Asia Pacific (Ex Japan) Index	15.07	13.51
MSCI Brazil Index	5.75	7.24
MSCI China A Index	16.15	12.45
MSCI Golden Dragon Index	14.75	12.25
MSCI Japan Index	14.41	12.69
NASDAQ 100 Index*	31.76	24.02
Russell 2000 Index*	76.96	22.75
S&P 500*	23.83	17.92
Dow Jones Industrial Average**	18.47	17.6

As it is clear from the table, these indices are distinguished by stock selection, sector composition, and valuation metrics, leading to different performance attributes. Investors should carefully consider an international fund's location and benchmark index to determine its future return potential.

One example is the Motilal Oswal Nasdaq 100 FOF, which targets similar returns to the Nasdaq 100 index, having higher trailing and forward P/E ratios than broader market indices such as the MSCI World Index or S&P Global 1200. Investors must thus choose between investing in niche themes or geographies that offer higher valuation bets or a broader exposure to global stocks.

International Mutual Funds Taxation

Equity is the underlying asset in which international mutual funds invest; however, the tax on their returns differs from domestic equity mutual funds. 

When investors redeem their holdings in international funds, any profits realised are treated as capital gains, which are taxed based on the holding period:

1. Short-Term Capital Gain (STCG): If the investment is redeemed within 3 years, the gains are short-term capital gains. Such gains are included in the investor’s income and taxed based on the particular tax rate.
2. Long-Term Capital Gain (LTCG): A 3-year holding period or more for the investment will result in gains being classified under long-term capital gains (LTCG). Such gains are taxed at a rate of 20% after giving credit for indexation, which adjusts the gains to consider the impact of price change or inflation on the returns.

Should You Invest in an International Fund?

Investing in International funds is ideally suited for the following types of investors:

1. Investors with already diversified portfolios domestically: Additional diversification can be achieved, and returns can be improved by the investors who have already diversified their Indian investment portfolio through investment in international funds.
2. Investors looking to invest in global brands and companies: By investing in an international fund, an investor can own shares of some of the renowned brands in the world that are not traded in Indian stock exchanges. Investors can also invest in the companies from which they consume products or services.
3. Investors looking to take advantage of new investing opportunities: At any given time, different markets may perform differently, and international funds provide investors with the possibility to take advantage of new opportunities in highly prospering markets when the domestic ones are underperforming or offer only an average yield.
4. Long-term buy and hold investors: Another scenario in which international funds play an important part in building a large corpus over a longer period, say; retirement or child education. Further, any investment period of at least 5-7 years or longer subdues the volatility of the stock markets, which works as a compounding play for the investor and produces good returns.

Factors To Be Considered Before Investing in International Funds

Before investing in international mutual funds, there are several important factors to consider:

• Understanding the fund's investment strategies: International funds may have the distribution of their funds related to their investment strategies and the markets that they can invest in. While some funds will contain Indian or developed market equities, others will prefer emerging ones. The understanding of fund distribution and the alignment of the strategy with your investment goals play an important role.
• Understanding the risks involved: International funds are accompanied by many advantages. However, they must be careful about many threats, for example:
• Geopolitical economic risk: Changes in the economy or political environment of the countries or regions where the fund is invested may lower returns. An example of a dire situation is the Russian invasion of Ukraine in 2022, which would bring high volatility and corrections in all of the global equity markets and, as a result, interrupt the momentum of these international funds.
• Currency risk: The investment capital is converted into another currency when investing, and the fund manager decides this. Yet, in most cases, this investment is done using the US dollar, which might be your best choice as the dollar value appreciates in rupees. Nevertheless, if the fund is invested using some other currency whose value is depreciating in rupee terms, then it is weaker for your portfolio. As a result, currency risk management in international fund holding is very important.
• Expense Ratio: International funds are mutual funds, and as such, they have an expense ratio that supports the operations and other costs of the fund, including the manager’s salary. The difference in the expense ratio should be compared when one is about to make a decision on an investment since this charge will reduce your total return.

Conclusion

Indian investors have international mutual funds that help them diversify their portfolios worldwide and exploit opportunities outside their domestic markets. By investing in foreign companies' stocks, these funds provide investors with superior stock market returns abroad and access to some of the world’s most notorious companies they could already consume as a product.

However, international investments are exposed to political instability, economic recessions, and currency fluctuations, which can affect the return. However, proper research, the ability to invest for at least 5-7 years, and a good diversification portfolio can help manage the risks associated with such funds.

With that said, in the next chapter, let us learn how to select global mutual funds that help you start with international investing.