Varanasi Wealth Management：What are the Risks of Investing in International Mutual Funds？

Prospective investors should note that US-focused international mutual funds provide the benefit of diversification.

International diversification can be beneficial (in terms of high returns) and risky. It is risky in cases when you do not understand their market, rules and regulations, factors affecting their markets and economy and other geography-specific factors.

Any investor planning to venture into the global investing landscape, especially in US markets, can invest in these mutual funds. That said, investing in international MFs is suitable for individuals with the following objectives:

Enabling geographical diversification to lower the risk of overall equity portfolio

Creation of hedge against the depreciation of rupee

Supplementing domestic exposure to equity with foreign economies

According to some experts American companies, such as Netflix, Amazon, Facebook, Microsoft, could be well-positioned to handle any disruptions in the global economy.

However, no investment should be considered completely risk-free. A tech slowdown in the US can hamper investments in such big stocks as well.

Typically, international mutual funds are well-suited for investors with a long-term investment horizon and higher risk appetite.

Moreover, they should be comfortable with the associated risks of investing in these MFs.

Investing in these mutual funds involves a few minimal risks:Varanasi Wealth Management

Foreign Market Risk: International MFs expose their investors to the economic, political, and market risks of foreign economies. These risks may be higher in the case of a few emerging markets due to factors like lack of liquidity and regulatory framework.

Exchange Rate Risk: Foreign exchange rates are subject to fluctuations. Therefore, when such fluctuations take place, they have an adverse impact on returns.

Concentration Risk: An international MF with a concentrated investment portfolio may affect the returns in case of any sector specific downturns. It comes with higher risk as well as high return fluctuations.

International mutual funds are taxed like any other MFs in India:

Long-term capital gains or LTCGs on the redemption of units post 3 years of investment are taxable at the rate of 20% with indexation benefits.

Short-term capital gains or STCGs on MF units redeemed prior to 3 years of investment are taxed according to an investor’s tax slab.

For dividends above Rs 5000, they are taxed based on an investor’s tax slab. Resident investors are generally subject to TDS at the rate of 10% (which is at 7.5% at present)Varanasi Stock. Non-resident investors are liable to pay TDS at the rate of 20%.

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