International mutual funds invest in foreign markets. However, in order to avail of the equity tax-advantage as per the mandate of the Income Tax department, generally such funds invest a minimum of 65% in stocks of Indian companies. Most often funds in the category adopt the funds of funds route wherein the funds invest in schemes floated by their foreign parent, which then further invest in international markets.
Primarily, foreign funds are ideal for investors who intend to diversify their equity portfolio. Investment in foreign mutual funds should be such that it holds very less or negative correlation with the domestic market. In such a case, only investors can reap optimal returns from investment in foreign mutual funds.
Few of the examples of international mutual funds are ICICI Prudential US Bluechip Equity Fund, DSP BlackRock US Flexible Equity Fund, Mirae Asset India-China Consumption Fund and DWS Global Thematic Offshore Fund Growth among others.
Risk associated with international mutual funds
International mutual funds majorly carry two risks that include currency and market risk. Besides such fund are also impacted by country-specific and geo-political factors.
Current risk originates as the investment is made in the domestic currency of the nation where funds have been invested. And returns depend on the performance of rupee against the other foreign currency. So, appreciation of rupee against the dollar at the time of redemption imply lower returns and vice-versa.
For taxation purposes, treatment of international mutual funds is similar to debt funds. And long-term capital gains accruing from appreciation in the capital over the term of the investment are subject to taxation @ 10% with indexation or 20% with indexation.
Short-term capital gains from debt-funds on the other hand are included in the total income and are taxed on the basis of your income tax slab rate.