An international fund, an Indian fund that invests in foreign equities or debt, will give you exposure to the stocks of companies outside India such as Starbucks or Google (owned by Alphabet). It will also diversify your portfolio from being concentrated in a single country. And for those of you who are planning a holiday abroad, an international fund can help by removing currency risk.
What are international funds?
International funds are mutual funds based in India and regulated in India by SEBI like all other types of mutual funds. These funds invest their entire corpus or some part of it in foreign stocks or foreign mutual funds.
What’s the currency deal?
You can only invest in international funds in rupees and redeem your money in rupees through a bank account in India. However, once you invest, your fund converts your money to the foreign currency applicable (say, dollars for a US fund). Thereafter the gain or loss in the fund is partly tied to how that foreign currency performs against the rupee. When you redeem your investment, the fund converts the foreign currency back into rupees and pays the money into your Indian bank account.
The holiday advantage
The big advantage for foreign holidays here is that your spending will also be in a foreign currency. Thus if the dollar rises in value against the rupee, your fund will also gain in value and allow you to pay for a more expensive foreign holiday. On the other hand, if the dollar falls against the rupee, your fund will also fall. However, your foreign holiday is also correspondingly cheaper for this same reason.
Any other benefits?
Yes, the other two big benefits of international funds are diversification and exposure. Indian stocks have their own cycles and they can underperform global peers from time to time as they did from 2010-13. The rupee has historically depreciated against the US Dollar and the Euro causing a drag on relative performance.
Also, Indian equity funds do not let you get direct exposure to many of the world’s leading companies such as Apple, Alphabet, Facebook, Inditex (think Zara) or Exxon Mobil. Foreign funds will get you this exposure.
International funds are classified as debt funds. If you hold them for a period of three years, you pay long-term capital gains tax on your gains on these funds at a rate of 20% with indexation. If you hold them for less than this period, your gains are added to your income and taxed as per your slab. (eg: 30% for the highest slab).
Here are three international funds you can invest in:
- ICICI Prudential US Bluechip Equity Fund (for the USA)
This fund has delivered 17.56% over the past year and 14.25% (annualized) over the past three years according to data from Value Research. As the name suggests, it invests in US blue chips such as Amazon.com, Starbucks, 21st Century Corp and Merck. The fund went flat between September 2014 and September 2015 delivering a -1.5% return but has otherwise delivered hefty returns in line with the booming US equity market. Its expense ratio at 1.21% is fairly modest for the direct plan.
- Invesco India European Growth Fund (for Europe)
This fund invests in European equities by feeding into the Invesco Pan European Equities Fund which is a global mutual fund run by Invesco. According to Morningstar, the global fund has a 54% exposure to the Eurozone, 34% to the UK and the balance mostly in non-Eurozone countries in Europe. Top holdings include BP, Roche and Royal Dutch Shell. Although the three year returns on the fund have been subdued at 8.3% (annualized), the fund has come roaring back in the past year with a 19.5% return.
- Parag Parikh Long Term Value Fund (for anywhere else)
This fund actually invests the bulk of its money (more than 65%) in Indian stocks. However, for this reason, it is classified as an equity fund and subject to a favourable tax treatment (15% for gains within one year and nil for gain over more than 1 year).
It also takes real concentrated bets, currently holding only 23 stocks. The fund invests a portion of its money (up to a 35%) in foreign stocks, mainly US ones. Its top holding is Alphabet (Google parent) with Facebook and UPS (think couriers) figuring in the top 10. Its three-year returns are 14% and one-year returns are a neat 30%, demonstrating real skill on part of the fund manager.
However be prepared to stay with the fund for at least two years – it has an exit load of 1% for up to 730 days of holding.