Rishabh Parakh is a Chartered Accountant by Profession and a founder and Chief Gardener of Money Plant Consultancy, an established firm based out of Maharashtra with operations expanded to Singapore & the UK. He is also an author of the Book titled "Financial Spirituality".
You would find many people advising you to invest in the international market to diversify your portfolio. This trend has suddenly caught everyone’s attention. In particular, Mutual Fund schemes having exposure to foreign markets are attracting a lot of attention.
Why has this discussion gained so much popularity all of a sudden?
The coronavirus has led to a correction across the global stock markets. If you are looking to invest for the long term, this is a good time to do it. For example, a developed nation like the US houses some of the global market leaders like Google, Netflix, Facebook, Amazon, Apple, Microsoft, etc. These companies are strongly placed to deal with the sudden disruptions caused by Covid-19. Due to the market correction, they are offering good price points to enter.
When should you choose international funds?
Geographical diversification is the primary reason for investing in international funds. Different economies may not move in the same directions, and international funds can help to support your returns when the Indian market is not performing. So, adding international funds to your portfolio can fetch you higher returns as it invests in multiple economies. However, these benefits come with their own risk, which you should be aware of. You need to be mindful about your risk profile, financial goals, and investment objectives. If the objective is purely to generate better returns, then it is not advisable to take this risk.
Make sure you have a good portfolio in India, which can help absorb the shock of any sudden changes in foreign markets, before investing overseas. Your investments should be spread across different asset classes like PF, PPF, FD, real estate, gold, mutual funds, stocks, etc. Without a good asset allocation in your own country’s economy, foreign investments should not be considered. These investments are highly suitable for HNI investors who can invest up to 5-10% of their money abroad.
What can international funds help you achieve?
If you want to send your child, say, to the US for higher education in the future, or wish to stay there, work there, or open a company there, then it is a great idea to invest in the US; apart from the return on investment, you can also benefit from dollar appreciation. Therefore, it helps you create your dollar bucket and provides a hedge against currency fluctuations. You can even plan this investment to fund your foreign vacation to avoid currency exchange shocks at a later stage.
Know the risks involved
Although there is good scope to earn better returns on your portfolio by investing in multiple economies or different markets, these benefits do come with a fair amount of risk. There are two major risks with investing in international funds. First is the currency exchange difference. If the rupee appreciates versus any currency that you are investing in, then the returns will suffer accordingly. Secondly, any economic and political changes can impact your investment, which is a significant and unpredictable risk.
The tax impact
You can invest up to $250,000 under Liberalised Remittance Scheme (LRS). The capital gains on your international funds funds are treated like your debt funds and gains made will be taxed accordingly. So, gains booked within a period of three years from the date of investment will be short term capital gains and it will be added to your tax slab. For long term capital gains, it will be 20 percent tax subject to indexation benefit.
How to select the international funds?
International funds comes in all shapes and sizes with a distinct bucket. There are funds that invest not only in different countries, from developed to emerging markets, but also in sectors and commodities including gold, technology, and agriculture. An investor should focus on developed markets like the American or European markets, because they play a bigger role in the global market. Since India is an emerging economy, this combination of Indian equity and international developed markets makes sense. If you have the time and willingness to go for direct stock market investing, stick to these market leaders. Otherwise, go with mutual fund schemes that have exposure to the international market in the form of a diversified fund or an ETF. Investing directly in stocks needs a good amount of time, money and expertise.
Considering the above points, you may start your international investment with a US-specific fund. Simply go with a broader index fund to avoid any sectoral risk. There are schemes that offer a mix of Indian stock market and international market stand to offer you superior tax advantage. But my advice is to stick to funds that have complete international exposure rather than a mix of Indian market and overseas stocks as you have your other domestic mutual fund schemes already. In any case, investing in an international fund should be done basis your risk profile and may not suit every investor profile, so invest mindfully.
The writer is a chartered accountant and founder and chief gardener of Money Plant Consultancy