International Equity Funds: What you should bear in mind before investing in them?

International Equity Funds and Index funds have been the buzz word recently in the mutual fund domain. These funds became popular recently due to US equity markets performing well compared to Indian markets, particularly large caps.

What is International Equity Fund?

A mutual fund which predominantly invests (greater than 80 percent of its assets) in foreign countries’ equity or equity-related instruments is classified as an International Equity Fund. As per SEBI re-categorisation norms, these funds come under the Sectoral/Thematic category. These funds operate in two ways. One, having a fund manager in India who takes a call on the international company’s stocks and makes investments. For example: ICICI Prudential US Bluechip Equity Fund, Aditya BSL International Equity Fund—Plan A, etc. Two, they operate as a Fund of Fund (FoF), which means they put your invested amount completely into another international fund and do not make investments into stocks themselves. For example: Franklin India Feeder-Franklin US Opportunities Fund, DSP US Flexible Equity Fund, etc.

Most of the international equity funds offered by AMCs in India are large-cap oriented and invest in US equities. While there are a few funds that invest in other geographies as well. For example Franklin Asian Equity Fund, Edelweiss Europe Dynamic Equity Offshore Fund, HSBC Brazil Fund, etc.

Investors might be attracted to the high returns that these funds have given over the short-term. However, they need to be aware that these returns are accompanied with high volatility as well.

 International Equity Funds: What you should bear in mind before investing in them?

World currencies. Representative image. Reuters

So, should you invest in an International Equity Fund? To answer this question, a proper understanding of the pros and cons of International Equity Funds and how they stack up against Indian Large Cap Funds is necessary.

Key points to know before investing in International Equity Funds

Taxation: Unlike Indian Large Cap Funds, capital gains on International Equity Funds attract debt taxation. This implies that for a holding period of less than three years, capital gains will be taxed as per your tax slab (can be as high as 30 percent plus surcharge and cess). If the holding period is more than three years, then the tax rate would be 20 percent with the benefit of indexation. Whereas in an Indian Large Cap Fund, long term capital gains (over one year) are tax-free up to Rs 1 lakh per year, and beyond that are taxed at 10 percent plus surcharge and cess.

Expense Ratios: Most of the International Equity Funds, being FoFs, charge their normal expenses as well as the expense of the underlying international scheme in which they are investing. This may result in expenses being higher than the standalone funds. So, you need to keep an eye on the total expenses while investing in these funds.

Currency hedging: As most of the investments into International Equity Funds are hedged as per the prevailing exchange rates, so you might get only partial benefit of rupee depreciation in your returns.

Higher Settlement Period: International Equity Funds have a higher settlement period of up to five days as compared to three days for Indian Large Cap Funds. This implies that it might take as long as 5 business days to get your money back from the time your redemption request was placed.

Requires more broad-based understanding and monitoring: As an Indian citizen, you may keep track of the domestic market performance through newspapers or other sources. However, you might not be tracking international markets regularly. Besides, an additional layer of complexity relates to finding out the underlying equity investments in FoFs. Also, their performance is dependent on a lot of factors such as economic cycle, government policies, global factors, you need a well-informed advisor to look after your portfolio or be an expert yourself.

Investing in them, however, has some benefits too, such as:

Diversification: Investing in international funds helps in diversifying your portfolio geographically. Different countries go through different cycles given the conditions in their domestic markets. Data suggests that most of the international funds have low correlation with Indian markets. So, international exposure may help reduce the volatility in your portfolio.

Invest in top companies: International funds will provide you an opportunity to invest in top companies of the world like Apple, Amazon, and Alphabet, etc. These companies are market leaders in their respective sectors and you may gain from their competitive advantages.

Updated Date: Jul 30, 2019 18:31:36 IST