Due to negative macro-economic growth, domestic stocks began to decline and continued to decline for some time. Be it large, mid or small-cap stocks, no one was spared from the market downturn. While the debt portion of the portfolio limited the downside to some extent, it was not substantial. Overall, Sunil’s portfolio lost over 30%. At the same time, Sunil observed that while the Indian markets were falling, many international stock markets were witnessing a spectacular rally. This is when he felt that diversifying the asset class alone was not enough. If you want a truly diversified portfolio, you should also look at geographic diversification.
need for geographic diversification
Many factors affecting global equities are different from those affecting domestic equities. In addition, global companies may see higher levels of growth than domestic companies due to a different macro-economic, demand and regulatory environment. As a result, foreign markets often do not move in the same direction as domestic stocks. Therefore, if Sunil had invested a small part of his equity portfolio in international stocks, he would not only have a limited portfolio, but also have potential portfolio returns. From a risk perspective, developed market stocks are generally more stable than emerging market stocks. As a result, these stocks generally do not see much price volatility. Overall, it can help reduce uptick in investment portfolios.
How can you achieve geographic diversification?
The best way to achieve geographic diversification is by investing in foreign markets. Now you can do this in two ways. You can either buy foreign stocks directly or you can invest in international mutual funds. Investing directly in foreign stocks can be difficult as it requires a great deal of knowledge about international markets, the ability to understand triggers for foreign equities, and also an understanding of the relevant securities market laws in the foreign country. Because of this many people earlier avoided international investment. However, today you can easily invest in international markets through international mutual funds.
International mutual funds are mutual fund schemes that invest in equities or fixed income securities of international markets. They can choose to buy foreign investments directly or they can invest in foreign funds through a Fund of Funds (FOF). International mutual funds provide domestic investors with the opportunity to participate in global disciplines, regions or countries. For example, US technology stocks are seeing strong growth and are expected to continue on this trajectory. If you want to profit from the rise in US technology stocks, you can simply invest in an international mutual fund that invests in US technology stocks.
How You Can Benefit From International Investing
Clearly, portfolio diversification is one of the major benefits of international investing. However, apart from diversification, there are many other benefits of international investing. Some of these include:
- Invest in companies that are not listed on your domestic stock exchange: Today, some foreign companies like Apple, Netflix, Facebook, Amazon, etc. have become a part of our dictionary as we use their products and services on almost daily basis. These are all high growth companies which are expected to deliver strong performance in future. However, since they are not listed on your domestic stock exchange, you cannot invest in these companies and participate in their growth. However, now with international mutual funds, you can easily benefit from their growth.
- Invest in topics that are not available in domestic markets: Undoubtedly, India is a market of opportunities and offers many avenues for wealth creation. However, international funds provide exposure to topics and opportunities that are not currently available in India but have the potential to see substantial growth in the future. For example, there is a lot of innovation happening in the technology sector or the renewable energy sector. Through international mutual funds, you can get access to such topics.
This is how you can invest in international mutual funds
Investing in international funds is no different from investing in domestic equity or debt funds. You can do this directly with an asset management company (AMC), through an investment advisor, or through the many available investment platforms. You can also start a Systematic Investment Plan (SIP) in an international mutual fund. Through a SIP, you can invest a fixed amount in an international fund at a time interval that suits you best. Also, you can get it starting from as low as Rs.500. This means that you can easily start a fortnightly, monthly or even a quarterly SIP in international mutual funds.
Taxation Aspects of International Mutual Funds You Should Know About
International mutual funds are taxed like debt mutual funds. Therefore, if you hold your investment in an international mutual fund for more than 3 years, the gains are classified as long-term and are taxed at the rate of 20% after indexation, which is equal to the holding period. Takes into account inflation during the period and increases the cost of acquisition accordingly. If you hold your investment for less than 3 years, the gains are classified as short-term capital gains and are taxed at the applicable rate as per your tax slab.
Often, people choose international goods and services under the assumption that the quality will be better. Many a times, families like to go on foreign holidays to learn about the foreign culture. Most of us are usually ready to try foreign cuisines and experiment with new flavours. However, we are a bit hesitant when it comes to giving an exotic flavor to our investment portfolio. However, with international mutual funds, there is no need to hold back now. If such investments align with your risk profile and asset allocation strategy, they can add a lot of value to your investment portfolio.
An Investor Education Initiative by Edelweiss Mutual Fund
All mutual fund investors have to go through a one-time KYC process. The investor should deal only with Registered Mutual Funds (RMF). For more details on KYC, RMF and procedure for filing/redressal of any complaint, visit –
https://www.edelweissmf.com/kyc-norms
Mutual fund investments are subject to market risks, read all the scheme related documents carefully.