In an increasingly interconnected world, the realm of investing has expanded beyond geographical boundaries. Brands such as Apple, Microsoft, Tesla, Google, are known and accepted across the world. If you are looking to participate in the growth prospects of these companies you have an easy way to invest in these stocks through International Fund of Funds or Global FoFs.
Before we delve into the options available for investors, let us understand how you can benefit from international diversification.
It is pertinent to note that no single country can outperform every year. Hence, it pays to have a diversified portfolio spanning different countries. For instance, in a year like 2013, while India was up by 7%, most other large markets outperformed India in the same period (except China). Source: Bloomberg.
In addition to geographical diversification, one unique advantage Global Fund of Funds offer is that investors get exposure to unique themes such as electric vehicle manufacturers, semiconductors, social media, artificial intelligence and so on, which may not be available in India.
Global events such as economic downturns and trade disputes, can have a profound impact on individual economies. Further, country specific risk such as currency exchange rates, political instability, geopolitical risk, regulatory uncertainty pose a risk to investors. By diversifying across different economies, Indian investors can reduce the impact of localized risks on their investment portfolios.
Investing in international Fund of Funds also provides a form of currency diversification. The value of Indian rupee can fluctuate against other currencies due to various economic factors. For instance, over the last five years, the INR has depreciated against the US dollar from 69 in August 2018 to 82 in August 2023. (Google Finance) By holding assets denominated in foreign currencies, investors can hedge against potential currency depreciation which can help in meeting for a goal such as international education, overseas travel, etc.
What options do Indian investors have to diversify internationally?
Investors can take exposure to international stocks through Global Fund of Funds which invest in global, emerging markets and REITs. Global Funds invest in funds domiciled outside India, which gives investors exposure to companies listed in other geographies.
Investing in a specific geography may not offer complete diversification. Thus, investors should consider funds which can invest across geographies, region, themes and sector which can provide optimal diversification.
Developed markets have a large economy, better liquidity, well-established infrastructure, advanced technologies, stable political environment and established industries. For instance, US stock market has the largest market capitalization of $46.2 trillion as of 2Q 2023. (Source: SIFMA.org)
Investing in developed economies helps investors get exposure to stocks such as Apple, Microsoft Corp, Amazon, Nvidia, Alphabet, Meta Platforms, United Health Group, among others.
Developed markets include Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, Netherlands, New Zealand, Sweden, Switzerland, the UK, the US, among others.
Emerging countries are becoming a force to reckon with. These economies are growing at a fast pace and now contribute 58% to the Global GDP. In fact, the Fortune 500 list of top corporates now have 29% companies from the emerging economies highlighting the scale and global recognition of emerging markets.
Emerging markets include Brazil, Chile, China, Colombia, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, among others. Investing in emerging markets can help investors get exposure to companies such as Taiwan Semiconductor, Tencent Holdings, Samsung Electronics, Alibaba, Meituan, and others.
Indian investors have an option to participate in these countries through Emerging Markets Fund of Fund.
(Source: IMF World Economic Outlook, Fortune 500)
Real Estate Investment Trusts (REITs) allow individuals to invest in real estate properties without having to directly own, manage or finance them. They invest in a portfolio of income-generating real estate assets, such as commercial properties (office buildings, shopping malls, hotels), residential properties and even infrastructure like cell towers, data centers, etc.
REITs provides diversification beyond the traditional asset classes like stocks and bonds and gold. Investing in a Global Real Estate FoF portfolio can provide additional geographical diversification benefit of investing across the globe.
Apart from physical real estate (primarily residential) most retail investors in India do not have too many options to participate in the upside that real estate as a sector has to offer. A ticket size as small as Rs 5,000 in a FoF structure makes participation in real estate more affordable as well.
Global Real Estate represents opportunities in various sub-sectors, which are either not available in India or it lacks the global scale and depth. Senior Living, Grade A Offices, Logistics, Cold Storage Facilities, Warehousing, Data Centres, Healthcare, Last Mile Retail, Urban Apartments, Self Storage etc.
Indian investors have an option to participate in real estate theme through REIT Fund of Funds.
How are Global Funds taxed
- Capital gains arising out of investments made from April 1, 2023, are taxed (short-term and long-term capital gains) as per your slab rate. Indexation benefit is not available.
- Fund of Funds (Domestic FoF and Global FoF) are taxed like Debt Funds.
- Tax on Income Distribution Cum Capital Withdrawal (IDCW): Taxed in the hands of investors. TDS of 10% (resident investors) and 20% for non-resident investors (plus applicable surcharge and cess). Tax-credit of TDS can be claimed at the time of filing the annual return.
- No TDS is deducted if IDCW income is below Rs 5,000 in a financial year.
- Investors should seek professional advice to understand the tax implications.
International diversification helps Indian investors get exposure to companies exhibiting accelerating growth rates, fueled by game changing technologies, products and services, thereby help diversify their portfolio and improve return prospects.
Investors bear the recurring expenses of the Fund of Fund schemes in addition to the expenses of other schemes in which Fund of Funds scheme makes investment.