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What are International Mutual Funds & How it is Taxed?

Investors today look for geographical diversification of investments. International mutual funds in India enable investors to invest in companies and fund businesses located anywhere across the globe. While these can have high-risk exposure, such funds have the potential to ensure chances of higher returns.

Are you planning to diversify your investment portfolio? Let us dig deep into this article and find out all about international funds and their benefits!

What are International Mutual Funds?

International mutual funds in India refer to funds invested in foreign companies. Often, investors look for ways to diversify their investment portfolio by involving foreign companies, and this fund can be adequate for this purpose. People mainly prefer this fund type as a replacement for other long-term investments. Moreover, with the growth of globalization, investors often try to find out about investment opportunities in foreign companies, and international mutual funds help them avail these opportunities.

Thus, if the question arises, “What is an international fund" it refers to such mutual fund investments involving foreign companies as a means of broadening the investment horizon. Having wholesome knowledge about the best international mutual funds in India enables investors to enhance their portfolios with impressive global fund investments. Even though high-risk factors are associated with such funds, they help investors improve their portfolios, gain more experience, and earn more returns.

How Do International Mutual Funds Work?

Investing in international mutual funds in India can be similar to investing in any other equity mutual fund. While investing, the currency remains in the Indian Rupee. The fund manager is responsible for investing the money in stocks of companies listed on exchanges outside India.

For this, fund managers can buy stocks directly from such companies and build an investor's portfolio. Otherwise, they can also invest in an existing global fund with a current pre-designed portfolio comprising foreign company stocks.

In either of the options, fund managers and their activities come under the administration of the Indian mutual fund companies. They need to follow the rules of the Securities Exchange Board of India (SEBI) to comply with the law.

Different Types of International Mutual Funds

While understanding the details of the international mutual funds in India, one might consider the various types of funds available under it. The following table will give you a detailed account of the different types of international funds and their basic functioning.

Types of International Funds	Explanations
Open-ended Funds	It has no restrictions on the number of shares for issuing. The investor can buy shares directly from the fund without involving the existing shareholders. These are perpetual funds. Their net asset value determines the issue price and share performances of open-ended funds.
Exchange-traded Funds	ETFs are funds traded mainly on the stock exchange. These consolidate other assets, including stocks, bonds and commodities, and enable the investors to yield high returns at minimum cost. Its advantages, such as tax efficacy and flexibility, are similar to stocks.
Equity Funds	Such funds mainly comprise stock investments with either active or passive management. These funds differ from each other based on the size of the company, its location, and its investment patterns. 65% of their funds are invested in equities.
Bond Funds	They usually invest in bonds or debt instruments. Investors prefer such funds because of their advantages, such as portfolio diversification, expert fund management, automatic reinvestment, and easy liquidity. One can choose from its types, including short-term, medium-term, and long-term funds.
Money Market Funds	Such funds enable investors to invest in money market instruments. These are known for coming at low risks, enabling low return investments from the investors.

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Benefits of Investing in International Mutual Funds

Recently, there has been a rising trend for investing in international funds in the current globalized world. People prefer investing in international mutual funds in India for several reasons.

1. Diversification

One of the significant positive features of international mutual funds in India is their ability to diversify geographically. The economic world is fluctuating, shifting its capabilities in several instances. It means that even if the Indian economy struggles in a few cases, the economies of other countries, such as China, the UK, or the US, might boom. Thus, finding suitable foreign mutual funds in India enables investors to avoid facing economic losses from the parent country.

2. Professional Management

Instances are not rare whereby investors lack enough knowledge and experience of professional management of a diverse portfolio. However, investing in an international fund enables them to understand the geographical diversification of investment portfolios better, thereby handling them better.

3. Liquidity

This is another significant advantage of international mutual funds. Once the investors have sold their shares, they will receive the amount equivalent to their investment value at the time of market closing.

4. Convenient Investment

The investors of international funds often consider the benefit of convenient investment regarding the administrative aspects of asset ownership. All the data regarding account statements, dividends from the fund, tax status of capital gains, etc., are sent to the investor via emails when investing in this fund. It helps them track and monitor their activities without facing hassles.

5. Global Market Ownership

Usually, every investor has aspirations of owning the global market with their investments. International mutual funds in India enable them to actualize such dreams. Investors can purchase stocks from the most prominent companies across the globe, including Adidas, Apple, and Facebook. It is often a motivation that works behind such investments.

Taxation on International Mutual Funds

Even though equity investment is considered an underlying asset in international funds, its taxation process might face some anomalies. It would be safe to say that the taxation process on returns from such global funds is similar to that of debt funds in India. For instance, investors are likely to make capital gains if they profit by selling their investments.

1. Short-Term Capital Gain (STCG) Tax

If an investor redeems the international fund investment within three years, it becomes an STCG. These gains are then added to the investor's income and then taxed. The taxation is done according to the tax bracket appropriate for individual investors.

2. Long-Term Capital Gain (LTCG) Tax

If the investors maintain their international fund investment for three or more years, it becomes LTCG. The profits are then taxed at 20% following their indexation.

Factors to Consider Before Investing in International Funds

Making an investment decision is never easy, and the question that arises here is, "Should I invest in international mutual funds?” Particularly, when it comes to something as risky as international funds, you should always consider various factors before investing your money. In this regard, some of the following factors can help you make a constructive decision.

1. Financial Goal

You should know your long-term and short-term financial goals before making any investment. Investing in an international mutual fund is only feasible if you take risks. Moreover, global funds are more suitable for investors looking for long-term investment returns. One should, therefore consider these financial goals.

2. Investment Strategies

Different investment funds naturally have different investment strategies. It depends on the fund managers who are constructing an investor’s portfolio. Portfolios, in some cases, can comprise both Indian and foreign equities. On the other hand, these can also include only emerging funds. Thus, you should ensure that your portfolio matches your financial requirements and objectives.

3. Investment Risks

As established already, high risks are associated with international funds. Economic and political risks are common found in the Indian domestic markets. While political turmoil can affect your investment plan, economic fluctuations can adversely affect the returns. Moreover, there can be risks pertaining to currency. For instance, international fund houses will convert your investment to USD from INR if you invest in the US market. In case of future depreciation, your portfolio will face a negative effect.

4. Expense Ratio

It is an essential factor for any form of investment. You should be aware of the expense ratio that might be levied on your investment portfolio. Asset Management Companies usually charge these fees, incorporated in your funds as an expense ratio. These are annual payments covering the charges of administration, operations, and the fund manager’s salary. You should be able to handle this fee.

Now that you know all about international funds, it would be safe to say that investment portfolio diversification can be an essential requirement for most investors. International mutual funds in India allow you to invest in global companies across the globe, gain high returns, and generate broad experience in fund management. However, the growing economic fluctuations might increase the risk factors for such funds.

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Disclaimer: The information provided on this website is for general informational purposes only and should not be construed as financial, investment, or legal advice. While we strive to provide accurate and up-to-date content, we do not guarantee the completeness, reliability, or suitability of the information for your specific needs.

We do not promote or endorse any financial product or service mentioned in these articles. Readers are advised to conduct their own research, consult with financial experts, and make informed decisions based on their unique financial circumstances. Any reliance you place on the information provided here is strictly at your own risk.

FAQs about International Mutual Funds

Are international funds a good investment option?

A popular opinion suggests that international funds can prove to be suitable investments. These increase your portfolio diversification and enhance your fund management experience, which can be helpful in your future. However, it would help if you considered its risk before investing.

How much should I invest in international funds?

It is up to the investors' discretion to come up with the right amount of investment. However, financial advisors often recommend investing 15%-25% of your money in foreign stocks.

How are International Mutual Funds Taxed?

International mutual funds are taxed based on the holding period of the investment. If held for less than three years, the gains are taxed as short-term capital gains at the investor's applicable tax slab rate. If held for more than three years, the gains are taxed as long-term capital gains at 20% with indexation benefits.