International MFs – How to choose the best one for you

From one each in 2018 and 2019, five in 2020 to 12 already in 2021, the international mutual fund space is hot with new launches. Three new launches—HDFC Developed World Indexes FoF, ICICI Pru NASDAQ 100 Index Fund and Mahindra Manu APAC REITs FOF—are in the pipeline whose NFOs have just got concluded.

Among existing international mutual funds, there are over 50 to choose from. There are local funds as well with some percentage invested in global equities. For those investors who haven’t tasted the global flavour as yet, this will help choose the best one.

Three latest NFOs

Active versus index funds

Even as interest in global funds has risen only recently, such funds have been there for a long time. Data from Morningstar shows the oldest international MF in India is Franklin India Technology Fund, whose inception date was August 22, 1998. However, mostly all international MFs are active funds with high expense ratio. It is only in 2010 that Nippon India launched an exchange traded fund (ETF)—Nippon India ETF Hang Seng BeES, followed by Motilal Oswal NASDAQ 100 ETF launched in 2011.

The first international index fund was launched only in 2018—Motilal Oswal Nasdaq 100 Fd of Fd. It is the fund of fund investing in Motilal Oswal Nasdaq 100 ETF. The second index fund)—Motilal Oswal S&P 500 Index)—was introduced in 2020, followed by two more)—Mirae Asset NYSE FANG+ ETF FoF, Kotak NASDAQ 100 Fund of Fund in 2021.

Index funds or ETFs give you average market return based on the underlying index. The expense ratio on these is lesser than what active funds charge which could be more than 2%.

One needs a demat account to invest in ETFs. Their Fund of Fund options are more convenient because they do not require a demat account. “Cost wise buying a Fund of Fund will be more expensive than buying an ETF on the foreign stock exchange. When you buy a fund of fund then you are not only paying for the cost of the underlying ETF, but also the additional expenses the mutual fund company charges for running the scheme in India,” says Vaibhav Porwal, co-founder, Dezerv.

Top 10 best-performing international funds

International Passive Funds

International ETFs

While building an international portfolio, the focus should be on diversification. “This is not just across funds and sectors but also across geographies. For an investor who has not dipped his toes yet into global investing yet, a good way to start off could be to look at some of the existing diversified equity names which have built a track record and seeing how those funds fit into their portfolio as a whole,” says Melvyn Santarita, analyst - manager research, Morningstar India.

Country-specific versus global funds

There are country specific international funds such as Edelweiss U.S. Value Equity Offshore Fund, Edelweiss Greater China Equity Offshore Fund, HSBC Brazil Fund or Nippon India Japan Equity Fund. In country-specific funds, the ones based in the U.S. are the most popular. Four such funds have been launched in calendar year 2021—IDFC U.S. Equity FOF, Mirae Asset NYSE FANG+ ETF FoF, SBI Intl Access—U.S. Equity FoF and Kotak NASDAQ 100 Fund of Fund. “U.S. equity markets represent more than 60% of the global market capitalisation and derive more than 40% of their revenues from non-U.S. countries. Hence, investing in U.S. mutual fund schemes will provide a diversified exposure to global economies,” says Porwal of Dezerv.

For even wider diversification, global equity funds could be the best bet as these are less volatile and provide consistent returns on a long-term basis. “A global equity fund takes majority of its exposure in developed countries such as the U.S., U.K., Germany, and Japan and with little to no exposure in emerging markets such as China and Taiwan,” he adds.

Local funds with global flavour

There are at least 19 domestic funds with global flavour, which have to invest minimum 65% in Indian equities. SBI Technology Opportunities Reg Gr and Parag Parikh Flexi Cap Fund are the two oldest such funds from this category.

“Some of the schemes, which are partially taking exposure in global stocks are hedging a significant portion of currency risk. That way, investors are having geographical diversification but not currency diversification. Also, the global exposure is concentrated in few limited stocks,” says Nishant Batra is the chief goal planner, Money, Mind & Milestones.

That said, a pureplay international fund makes better sense. There is tax angle as well. International MFs are more tax efficient. “Local schemes with global exposure are treated as equity funds from a taxation perspective. It means if you sell your investments after a year, you pay 10% long-term capital gains tax on your returns. On the other hand, International FoFs are taxed similar to debt mutual funds i.e 20% long term capital gains tax with indexation benefit if held for more than 3 years,” says Sameer Kaul, MD and CEO, TrustPlutus Wealth (India).

Link global goals with global MFs

If you have plans to shift abroad after a few years, want foreign education for your children, or simply a vacation abroad, you may consider linking these goals with your international MF investment. It will hedge you against currency depreciation. “It makes a lot of sense to diversify the currency risk for goals planned in other currencies. I will recommend to invest a “portion” of money required for such goals in global assets. The goal should be at least seven years away to ride through the equity volatility of a global equity fund,” says Batra of Money, Mind & Milestones.

Global MFs for short-term goals

Avoid investing in global MFs if you have a short-term goal in mind. Batra has some calculations to prove the point. He collected rolling returns data for S&P 500 TRI in rupee terms, between January 1, 2000 and September 30, 2021. He concludes that on a one-year rolling, the index has given negative returns 20.3% of times, with minus 32.6% being the worst.

“The same parameters for two-year rolling are 23.7% of times negative returns and minus 23.10% was the worst outcome. As soon as he raised the holding period to seven years, only 4.6% of times, the index delivered negative returns. The worst possible return also got reduced to minus 4.9%. “This is the reason why I advise against investing in any international fund if your investment horizon is less than seven years,” Batra says.

So far as NFOs are concerned, it is wise to invest in funds with a proven track record rather than parking money in a new scheme whose portfolio construction and expense ratio is not known.