Is it safe to invest in international equity funds through an Indian mutual fund here?
Mutual fund companies in India are regulated by the Securities and Exchange Board of India (SEBI), and the licence to run such as companies is accorded after the required due diligence by the regulator. Hence, international equity funds which are offered by these fund companies are safe from the risk of fraud. However, like other investments they are subjected to investment risk and hence the capital invested too is at risk like any other domestic equity funds. International funds provide an opportunity to diversify your portfolio across geographies giving exposure to varied economic growth drivers.
There are two sources of portfolio returns viz. asset-based return and currency return. In addition to the underlying asset based return, these funds also gain if the Indian Rupee depreciates against the currency in which the underlying assets are denominated. Hence, international funds should form an integral part of your portfolio allocation, as they offer a hedge against currency depreciation. Exposure to international funds could be about 5-25% of your portfolio depending upon your investment horizon and risk suitability.
Recently, international funds have been attracting attention as they have outperformed domestic funds over the past 2-3 years. Over the past decade too, developed markets have outperformed emerging markets by a fair margin. Some funds invest directly into securities of the respective regions, while some are feeder funds which in turn invest in the internationally domiciled parent through the fund-of-fund (F-o-F) route. Other funds offered are those investing in commodities, mining, agriculture etc. Few of these funds also follow a passive investment strategy, wherein they track a particular global index.
While investing in international funds, check the prevailing valuations of the underlying regions that the fund invests in. Investors investing in feeder funds should also consider the expense of the underlying parent fund. International funds (even though equity-based) are taxed like fixed-income funds, i.e., the long-term gains (holding period of more than three years) are taxed at 20% post-indexation of costs for and at marginal tax rate for short-term gains.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to firstname.lastname@example.org