Investing abroad through mutual funds

Many of you might be not familiar with this information that you can actually invest in abroad companies through mutual funds. In this article, we will discuss the channels through which you can invest in international mutual funds, their benefits and their taxability.

Different Channels through which you can invest in international funds

The following are the most popular channels to invest in international funds-

1. Fund of funds (FOF)

Through this channel, the investor will invest in an Indian mutual fund and that Indian mutual fund will invest in an international mutual fund and that international fund will invest in stocks. This way the investor indirectly invests in abroad stocks.

Example: DSPUS flexible equity fund

2. Exchange traded funds (ETF)

ETF'S are a collection of various securities such as bonds, shares, money market instruments, etc. ETFs are mostly passively managed, as they typically track a specific market index. One of the most famous ETFs are Index ETF's which invests in an underlying index. The investor can invest in Indian ETF which further invests in an abroad ETF or abroad stocks/index.

Example: Motilal Oswal NASDAQ hundred ETF

3. Feeder Fund

In this type of fund there is a master-feeder relation. The feeder fund pools the capital commitments of investors and invests such capital into an umbrella fund, often called a master fund. The master fund will invest all the money as per its choice in various securities. Eg: a US master fund has a feeder fund in India. So an investor can give money to the feeder fund which will be invested by the US master fund in abroad stocks/ETF, etc.

Example: Invesco India feeder Invesco global equity income fund

4. Actively managed funds

In this type of fund the investor will invest in an Indian mutual fund. The fund manager of that mutual fund will choose the stocks of the abroad companies in which the money will be invested.

Example: Nippon India US equity opportunity

Benefits of investing in international funds

1. Diversification

It is highly advisable that never put all your eggs in one basket. So it is a great option that instead of investing all the money in one country you can diversify your portfolio by investing your money in different countries through international funds.

2. Currency depreciation

By investing in international funds there is an opportunity for investors to enjoy the gains from the currency depreciation of the home currency.

Taxation of gains from International funds

Let us understand the taxation of the international funds. If I invest in international equity funds still it would be treated as if it is a debt fund. The short-term and long-term gain would be considered after taking into account the holding period. For long-term gain, the period of holding should be more than 36 months. If it is less than 36 months then it would be considered as a short-term gain.

Short-term capital gain would be taxed as per the individual's tax bracket. The long-term capital gain would be taxed at the rate of 20% with indexation benefit.