SEBI vide their circular dated 05/11/2020 had permitted the Mutual Funds to make overseas investments subject to a maximum of US $ 600 million per Mutual Fund, within the overall industry limit of US $ 7 billion.
The regulator’s move was an opportunity for the investors interested to start investing in segments across the world having reasonable or low valuations. International Funds are basically mutual funds which invest in companies located outside the investor’s country of residence. By investing in a global fund, investors get the chance to be a part of a much more extensive and diverse portfolio with the help of experienced Fund Managers who are experts in the international market.
Investing in international mutual funds differs from investing in other domestic equity mutual funds. The money is invested in rupees, and in return, units of the funds are allocated to investors. The fund manager takes the money and invests it in the stocks of companies listed on exchanges outside of India. There may be Country Specific Funds – where the investment will be invested in the stock markets of a particular country, or funds with Global exposures, where the portfolio is made with stocks of companies from across the world with global diversifications.
The exposure in International/Global Funds helps an investor to have the benefits of geographical diversification, the opportunity to become an owner of global market leaders like Facebook, Apple etc., and to get the opportunity to take exposure in foreign currency through investing in rupees and to hedge the risk of depreciation in the home currency at the time of redemption. There are funds whose portfolio consists of both Indian equities as well as foreign equities and also the funds that are focused on investing in stocks of emerging markets only.
The returns from international funds are taxed the way debt funds are taxed in India. If you redeem investments in an international fund within three years, it would be taxed as Short-Term Capital Gains, and the gains will be added to your total income, and you will have to pay tax as per your tax slab. If you redeem the investment after three years, the gains will be taxed as Long-Term Capital Gains @ 20% after indexation.
Albeit, there are some exceptions in the tax treatment of the international funds. As per the SEBI rule, if an equity fund has a minimum of 65% of its corpus invested in listed Indian equities and the rest in overseas equities, then the taxation of such international funds will be as per the tax treatment of domestic equity Mutual Funds.
In January 2022, SEBI had asked AMCs to stop taking fresh subscriptions in the International Funds as the Mutual Funds Industry had crossed the permitted limit of USD 7 billion for overseas investments.
However, in the wake of a significant correction in global markets that brought down the valuation of international stocks, SEBI has once again permitted mutual funds (vide letter dated 17/06/22) to invest in foreign stocks within the overall limit of USD 7 billion for the Industry.
Considering the recent meltdown of the global market, it is a welcome move for the investors who want to use this correction to deploy fresh funds. But, considering the uncertainties in the economy due to rising global inflation and expectations of more rate hikes (as announced clearly by the US Federal Reserve) in the coming days, it is advisable not to jump over the opportunity to invest a significant amount in international funds right now.
New investors may take exposure through SIP only. The existing investors, who want to average out, should put their lump sum amount in a staggered manner. Ideally, a person should not take more than 10% of his investable corpus in the International Funds. But, the limit of investment decisions always depends on the risk appetite of the concerned investor.
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– Suman Dan