Understand the Taxation on International funds
Once upon a time, it was considered to be a privilege to own foreign goods in India. Today, Apple, Amazon, Netflix, Facebook have become common names in Indian households whose products and services almost every one of us uses. Indian consumers are more than happy to buy foreign products, should they shy away from investing in these foreign companies to whom they are giving business? Now investing in foreign markets is as simple as buying a coffee from a Starbucks outlet or ordering a Mac Book from Amazon. You can extend your love for international products and services by investing in these international companies listed outside India through international mutual funds.
What are international mutual funds?
International funds are open ended mutual fund schemes that aim at generating long term capital appreciation by predominantly investing a large chunk of their investible corpus in equity and equity related instruments of companies that are listed outside India. They pool money from investors sharing a common investment objective and invest it in foreign markets, excluding domestic markets from where they originate.
An international fund may either directly invest in equity and equity related instruments of companies listed outside India or they may act as a feeder fund that invests in funds managed by an overseas Asset Management Company.
Why consider international funds?
One of the primary reasons why investors consider international funds is because they offer diversification that is beyond geographical borders. You may have a diversified portfolio within domestic markets but investing in international funds offers diversification at the international level. Depending on its nature and investment objective, an international fund may invest in stocks of companies to one country, sometimes multiple countries, sometimes only of companies belonging to a specific region, and other times in companies from different companies that fall under the same sector or industry.
By investing the investor’s money across various international markets, these funds offer true diversification thus, reducing the portfolio’s concentration risk.
How are international funds taxed?
We all know that international funds invest in equity and equity related instruments of companies that are listed outside India. So, in that sense, one would expect international mutual funds to be taxed just like domestic equity funds. However, that is not the case. Even though they invest in global markets, in India, international mutual funds are taxed like debt mutual funds.
Investments held for less than 36 months are treated as short-term whereas those beyond that are treated as long-term. Short-term capital gains (STCG) on these investments are taxed as per the investor’s income tax slab. On the other hand, long-term capital gains are taxed at 20% after the indexation benefit.
How to invest in international funds?
Indian investors can invest in International funds through any reputed AMC or fund house that is registered with SEBI. One can either make a one time lump sum investment in international funds or they can opt for a Systematic Investment Plan. SIP is a simple and effective way to save and invest a fixed sum in mutual funds. Investors can consider a monthly SIP to inculcate the discipline of regular investing. They can also use an online SIP calculator, a free tool that any layman uses to calculate the future returns generated through SIP investments. SIPs offer flexibility which allows the investor to stop their investments midway without having to pay and cancellation charges. Investors can increase or decrease their monthly SIP sum.
Mutual funds like international funds do not guarantee returns. Investors should consult their financial advisor before investing.