Do you want to diversify your mutual fund holdings beyond India? You can, indeed! Global funds, often known as international funds, provide a profitable investing avenue for foreign stocks. Through this equity-linked instrument, you can invest in any foreign company that is based somewhere other than your place of residence.
What are international funds?
Mutual funds that invest in foreign businesses are known as international funds. These funds, also known as offshore or international funds, are fantastic choices for long-term investments. The best mutual funds that invest in overseas businesses assist you in diversifying your holdings across the greatest international companies and industries unavailable in your local nation. Over very long time horizons, these funds could produce good returns.
How do International Mutual Funds work?
The same rules apply to investing in foreign mutual funds as in any other equity mutual fund. Investors receive units of the funds after the money is invested in rupees. The money is given to the fund manager, who uses it to buy equities in businesses listed on exchanges far outside India. Your money is now invested by the fund manager in foreign stocks using two separate strategies.
- By directly investing in stocks and constructing a portfolio
- As an alternative, you might put money into a global fund that already has an established portfolio of stocks from multinational firms.
Whatever path they choose, they are all handled by Indian mutual fund firms. Like all other mutual funds, they are overseen by the Securities Exchange Board of India (SEBI).
Types of International Mutual Funds
- Global funds: There is a difference between global funds and international mutual funds, despite what you may believe. Global funds invest in businesses in all nations, including the investor’s own, whereas international mutual funds only invest in companies outside the investor’s home nation.
- Regional funds: As their name implies, regional funds invest in businesses from a particular geographic area, like Southeast Asia or Europe. Instead of purchasing international or global funds, investors knowledgeable about regional markets can purchase various regional funds.
- Country funds: Country funds make investments in foreign nation-based corporations. This benefit is that investors can take advantage of a specific country’s economy without having to keep track of data from several geographical areas.
- Global sector funds: In this instance, the emphasis is on investing in businesses operating in several nations in a specific field.
Taxation On International Mutual Funds
Although stock investments are their underlying asset, there is a slight peculiarity in how overseas mutual funds are taxed. It makes sense to presume that they will be taxed similarly to all other equity mutual funds in India. However, this is untrue. International fund returns are taxed in the same manner as debt fund returns. A capital gain occurs when you earn from selling your investment. According to the debt taxation scheme, the capital gains from selling your investment are taxed based on how long you owned it. The same is true of foreign funds:
- Short-Term Capital Gain (STCG): This type of gain occurs when you redeem your investment in an international fund within three years. Your income is increased by these gains or earnings, which are taxed following your tax bracket.
- Long-Term Capital Gain (LTCG): Your returns are categorised as long-term capital gain if you invest for three years or more (LTCG). After indexation, the tax rate on these gains is 20%.
To reduce the risk of short-term geopolitical developments, an investment horizon of three years or more is recommended for foreign mutual funds. Additionally, it will be advantageous from a tax viewpoint because these funds are treated similarly to debt funds, and you can benefit from indexation through long-term capital gains tax.