What is an International Fund and How Does it Work

What is an International Fund?

An international fund is a mutual fund scheme that invests in equity or debt securities of entities located outside India and listed on overseas markets. Investors use international mutual fund schemes to gain exposure to overseas markets. These schemes operate in accordance with SEBI regulations governing overseas investments. They report foreign investments and associated risks in their scheme documents.

How International Funds Operate

International funds invest through authorised overseas custodians. Returns reflect both the performance of underlying foreign securities and movements in exchange rates between the rupee and the invested currency.

1. Investment Process

   International funds pool investor capital and deploy it through authorised custodians and brokers in overseas markets. The fund house converts rupees into the relevant foreign currency when purchasing securities, creating dual exposure to both asset performance and exchange rate movements.

2. Return Determinants

   Returns are influenced by how the foreign securities perform, changes in currency, expense ratios, and, for passive schemes, tracking error, together with foreign dividend taxation. When the rupee weakens against the invested currency, returns for Indian investors may rise even if the price of the foreign asset remains unchanged. On the other hand, if the rupee strengthens, profits may reduce. Scheme documents and fact sheets show clear details on country allocation and currency exposure.

Importance of International Funds

The following are the key reasons why international funds matter for investors:

• Diversification Beyond Domestic Markets: They cut the concentration tied to India's economy by distributing investments across different regions and cycles.
• Access to Global Leaders: These funds allow you to explore industry leaders, pioneering firms, and sectors that are uncommon in India, for example, large semiconductor businesses and international e-commerce platforms.
• Hedge Against Country-Specific Risks: International funds offer protection against regulatory changes, political events, or economic slowdowns that may affect the domestic market.
• Long-Term Growth Opportunities: These funds give you a chance to share in the growth of developed and emerging markets.

Tax Treatment and Compliance

For taxation purposes, international mutual funds are generally treated as non-equity funds because they do not meet the requirement of investing at least 65% of their assets in Indian equities. Capital gains from international mutual funds purchased on or after 1 April 2023 are taxed at the investor's applicable income tax slab rate, regardless of the holding period. The existing tax regime does not provide any benefit of indexation. SEBI directs international investment funds to publish foreign assets, expense ratios, benchmarks, and performance results within their scheme information materials.