(This article was first published in The Economic Times.)
This year may not begin on a positive note for the Indian equity markets. Even on the last Monday of the year, the markets tanked to a seven-month low. While 2016 saw fluctuating fortunes for Indian equities, 2017 isn’t expected to be better.
Demonetisation has impacted domestic growth and consumption. While some sectors like banking and financial services are expected to benefit from the push for a cashless economy , the broader markets will take time to recover. Experts believe the Indian equity markets will continue to be choppy in 2017. On the other hand, developed markets may see a better 2017. Donald Trump’s triumph in the US elections may actually turn out to be good news for the economy since he promises to be pro-business. The US dollar is expected to remain strong too. The European Commission’s European Economic Forecast study says the countries in the region are also expected to benefit from global growth, low oil prices and supportive economic policies.
It seems like the right time, therefore, for Indian investors to invest in international mutual funds.
“Geographic diversification is a good idea and investing in international funds should be a strategic call, irrespective of whether those markets are doing well at a particular point,“ says Suresh Sadagopan, founder, Ladder7 Financial Advisories. While a lot of factors that influence a country’s economy are beyond the investors’ control, what they can control are their investment goals and portfolio allocation. “Equity fund portfolios should be diversified across geographies, like they are across market capitalisation and sectors,“ he says.
The level of diversification depends on how much you intend to invest, your risk appetite and your goals. Ankur Kapur, Founder, Plutus Capital, says: “Global diversification is important, but most investors should not exceed 5-10% allocation.“ However, if your goals are aligned with foreign currencies, you can consider a higher exposure. For instance, if you’re investing to send your child to the US for higher education, a US-focussed fund would help you protect the value of currency.
But the caveat with international funds is that they’re more complicated than domestic equity funds. Here are some of the risks associated with them that you should consider before investing:
Currency rate volatility
When you invest in an international fund, you invest the rupee in a different currency . Hence, how the fund performs depends not only on the stocks in its portfolio but also on how the rupee fares against that currency . If the rupee depreciates, the fund will do well, but it will lose out if the rupee appreciates.
Despite being equity-oriented mutual funds, international funds are treated as debt funds for tax purposes. Therefore, long-term gains on investments held for more than a year are not tax-free.For international funds, long-term is defined as three years or more.
While short-term gains will be added to your income, long-term gains will be taxed at 10% without indexation or 20% with indexation. Hence, you should ideally invest in international funds with a three-year view.
Late redemption realisation
When you redeem your investments from a domestic equity fund, the proceeds are deposited in your bank account within three working days.For international funds, this could take longer due to factors like holidays in the country in question. Indian investors can benefit from exposure to international funds, but it should be a strategic decision, rather than a time-specific one. So, invest in international funds because geographical diversification can help your portfolio perform better, not because India is doing poorly compared to other economies.