Investing in International Mutual Funds:
Essential for Diversification or
Overrated?

As we are all aware, Mutual Funds invest in different securities such as Equity, Debt, Money Markets, Commodities, Real Estate, etc., which are marketable or listed in India.

There are a few specific mutual funds that invest in stocks listed outside India, and these are called ‘International Mutual Funds’. These funds help you invest in some of the biggest companies in the world and provide international diversification.

A few advantages of International Funds are listed below:

• You get exposure to global leaders like Amazon, Facebook, and Google, etc.
• It is a good way to reduce portfolio risk through diversification, as markets around the world rarely go down together
• It is suitable for you if you have a minimum investment tenure of at least 5 years away

How do International Mutual Funds work?

International mutual fund investing is identical to investing in any other type of equity mutual fund. The investment is made in rupees, and investors receive units of the money in exchange. The funds are transferred to equities of companies listed on exchanges outside of India by the fund management. The fund manager can now invest your money in international stocks in two different ways.

• You can invest in an established global fund that already has a pre-designed portfolio made up of equities of international companies,
• Or you can buy stocks directly and develop your own portfolio.

In any case, Indian mutual fund companies are in charge of administering them. The Securities Exchange Board of India (SEBI) oversees them, just like it does all other mutual funds.

Who Should Invest in International Funds?

• Equity Investors with a Well-Diversified Domestic Portfolio: Newcomer investors who are relatively new to investing in mutual funds should refrain from making a hasty move into foreign funds. For investors who currently own a diverse portfolio of Indian businesses, they are wonderful. By investing in foreign funds, these investors can further diversify their holdings and increase their chances of earning healthy returns.
• Seeking to invest in worldwide Market Leaders: A few worldwide businesses, such as Netflix, OnePlus, Apple, Facebook, Vivo, and others, are market leaders because they are incredibly popular.  The sole drawback is that Indian stock exchanges do not list these market leaders.  Therefore, you can invest in foreign funds if you wish to own the brands that you truly adore.  Additionally, you will receive a portion of these businesses' earnings.
• Seeking to Take Advantage of Opportunities in Various Markets: At any given time, the performance of various markets varies.  There have been times when the US markets were doing extraordinarily well while the Indian markets were doing just well.  In 2016, for example, the Dow Jones Industrial Average Index (US stock market index) increased by 15.24% whereas the BSE Sensex only increased by 3.91%.  Therefore, by investing in foreign funds, investors can profit from overseas markets even when the domestic markets are suffering or are producing respectable returns.
• Investors with a Long-Term Horizon: International funds can assist you in attaining your long-term objectives, such as retirement or your child's education, if you're an investor who wants to build a sizable corpus for such purposes.  You are protected from the volatility of equity markets by having a long investment horizon.  Additionally, it allows you to benefit from compounding.  You should have an investing horizon of at least five years to benefit from overseas funds.

Features of International Mutual Funds:

• Diversification: Investors can choose to diversify their portfolios by using international mutual funds.  An investor who mostly makes investments in domestic markets may want to think about diversifying their holdings into foreign markets.
• Greater risk: Investing in foreign funds may increase returns, but it also increases the likelihood of a greater risk profile.
• Fund management: When managing an international mutual fund, fund managers must be engaged and aware of developments in the world markets.  Their years of experience and knowledge in handling these kinds of cash can be helpful.
• Currency Exchange Rates: Currency and international mutual funds have a strong connection since investor returns are directly impacted by currency exchange rates. The returns from the international fund rise when a foreign currency appreciates relative to the investor's home currency (such as the Indian Rupee). On the other hand, returns fall if the home currency gains strength. This becomes a source of risk when the home currency appreciates and a possible hedge against depreciation.

Before investing in foreign funds, bear the following points in mind:

• Have some understanding of the global financial markets, economy, and how they operate.
• Carefully consider the international mutual fund's track record, different risks, sector allocation, and other factors.
• The international mutual fund's investing objective should preferably coincide with your financial objectives.
• Pick funds that make investments in foreign markets that are generally more stable than others.

Few Top-Performing International Equity Mutual Funds:

Taxation on International Equity Mutual Funds:

In India, the taxation of international equity mutual funds for investments made on or after April 1, 2025, is as follows:

• Short-Term Capital Gains (STCG):
  • Holding Period: Less than 24 months. 
  • Tax Rate: Your applicable income tax slab rate. 

• Long-Term Capital Gains (LTCG):
  • Holding Period: 24 months or more. 
  • Tax Rate: A flat 12.5%. 
  • Exemption: There is no exemption limit for international funds, unlike the ₹1.25 lakh exemption for domestic equity funds. 

Conclusion:

According to the expert, it is advisable to have international exposure, and a 5-10% allocation is a good fit for an equity portfolio, if it is suitable for you. However, you recommend consulting your financial advisor before investing.

Your Next Step: Securing Your Retirement Cash Flow

Once you have built a strong, diversified corpus, the next critical challenge is managing your withdrawals to create a stable, tax-efficient pension. Which method gives you maximum control over your money in retirement?

To understand the most vital decision for post-retirement life, watch our detailed guide:

???? Watch the Full Video Explanation

If you prefer learning through visuals, check out my detailed YouTube video where I explain how International Mutual Funds work, their benefits, risks, taxation, and top-performing global funds in a simple and clear manner.

How to Invest in Apple, Tesla, Amazon from India | International Mutual Funds Explained