As part of diversification, it is often advised to invest in stocks of different sectors and companies of different market cap. For geographical diversification in equity investment, investors in India are increasingly opting for international mutual funds, given that leading asset management companies (AMCs) in India, including ICICI Prudential and Motilal Oswal that have started offering dedicated funds to invest in the US markets.
When is a fund considered an international equity mutual fund?- Types of funds
A mutual fund is classified as an international equity fund if over 80% of its total assets are invested in equities or equity-linked assets of a foreign country.
As per SEBI rules, these come under the Sectoral/Thematic category.
Largely, they are operated in 3 forms:
- Actively managed funds: An Indian AMC creates a fund wherein the fund manager actively takes a call on which international company stocks to invest in. For example ICICI Prudential US Bluechip Equity Fund, Aditya BSL International Equity Fund- Plan A
- Fund of Funds: Investments made into these funds are directly fed into an international fund that it is linked to. For example, Franklin India Feeder-Franklin US Opportunities Fund, DSP US Flexible Equity Fund
- Index funds: These are passively managed and are aimed at replicating movement in an existing market index. For example, Motilal Oswal S&P 500 Index Fund.
The attraction of investing in international funds is gaining exposure to some of the best international companies in the world.
In India, the international mutual fund options offered by AMCs are mainly focused on large caps and western advanced economies that are historically considered to be more stable than emerging economies. Investment in American tech firms like Apple, Google and Facebook are also quite an attraction for some investors.
For those who wish to take risks, investments can also be made in funds that invest in other large promising developing economies like Brazil and China.
Further, buying any of these international mutual funds is as easy as buying stocks using your trading account. In fact, mutual funds and ETFs (exchange-traded funds) are probably the easiest way to gain exposure to foreign stocks from India. You do not need to go through the hassle of understanding foreign markets and picking stocks yourself.
Taxation- the negative
The issue of taxation that could prove to be a potential pitfall. Unlike capital gains from equity and equity-related assets from India, international equity mutual funds attract debt taxation.
If you were to invest in Indian stocks or an equity mutual fund investing solely in Indian stocks, gains made from the sale of such an investment after holding the investment for over a year will be considered long-term capital gains (LTCG) and is tax-free up to Rs 1 lakh. Beyond Rs 1 lakh, these returns are taxed at 10% plus surcharge and cess.
International mutual funds, on the other hand, attract debt taxation which means that holdings are considering long term investments when held for 3 years.
This means that tax on short term capital gains (STCG) is based on your tax slab, which means that tax on gains made could be as high as 30% plus a surcharge.
As for LTCG, the tax rate would be 20% with the benefit of indexation.
Higher settlement period- the negative
International Equity Funds also have a longer settlement period when compared to Indian equity mutual funds. These take up to 5 days when compared to 3 days for a domestic fund. This willl mean it will 2 days longer to get your funds credited from the time your redemption request is placed.
The article is purely informational and is not a solicitation to buy, sell in securities mentioned in the article. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article.
About the author
Olga Robert is an M.Com graduate covering equity markets and personal finance for nearly three years. Her interests include tax planning, equities, DIY personal finance management and government schemes.