Pros & Cons of International Exposure in Mutual Fund Portfolio

International mutual funds allow investors to diversify their portfolios beyond domestic markets. By investing in companies and securities globally, investors can potentially reap the benefits of global economic growth and reduce their exposure to domestic market risks. However, like any investment, international funds come with their own set of risks and rewards.

Pros of International Exposure

1. Diversification:
   • Geographic Diversification: By investing in companies from different countries, investors can reduce their exposure to country-specific risks. For example, if a particular country’s economy is facing challenges, the impact on the overall portfolio can be mitigated.
   • Currency Diversification: Investing in foreign currencies can help hedge against the depreciation of the domestic currency. This can be particularly beneficial in times of high inflation or economic instability.
   • Sector Diversification: International funds often invest in sectors that may not be well-represented in domestic markets. This can provide investors with exposure to new and emerging industries.
2. Higher Potential Returns:
   • Emerging Markets: Emerging markets, such as China and India, offer significant growth potential. Investing in international funds that focus on these markets can lead to higher returns over the long term.
   • Global Economic Growth: By investing in global companies, investors can participate in the overall growth of the global economy.
3. Access to Global Innovations:
   • International funds provide access to cutting-edge technologies and innovative companies that may not be available in domestic markets. This can lead to higher long-term returns.

Cons of International Exposure

1. Currency Risk:
   • Fluctuations in exchange rates can impact the performance of international funds. A weakening of the domestic currency can lead to higher returns, while a strengthening can lead to lower returns.
2. Political and Economic Risks:
   • Political instability, economic downturns, and geopolitical tensions in foreign countries can negatively impact the performance of international funds.
3. Higher Fees:
   • International funds often have higher expense ratios than domestic funds. This is due to the additional costs associated with investing in foreign markets, such as currency exchange fees and foreign custody fees.
4. Complexity:
   • Investing in international funds can be more complex than investing in domestic funds. Investors need to understand the nuances of foreign markets, including different accounting standards, regulatory environments, and tax implications.

Taxation of International Funds in India (As of 2024)

The Indian government has made significant changes to the taxation of international funds in the 2024 Union Budget. Here’s a breakdown of the current tax regime:

• Short-Term Capital Gains Tax:
  • If you sell your international fund units within 24 months of purchase, the profits will be taxed as short-term capital gains at your applicable income tax slab rate.
• Long-Term Capital Gains Tax:
  • If you hold your international fund units for more than 24 months, the profits will be taxed as long-term capital gains at a flat rate of 12.5%.

It’s important to note that these tax rules can change, so it’s advisable to consult with a tax professional for the most up-to-date information.

Conclusion

International funds can be a valuable addition to a diversified investment portfolio. However, it’s crucial to carefully consider the risks and rewards before investing. Investors should conduct thorough research, understand the underlying investments, and consult a financial advisor to make informed decisions. We at Moneyfront have a dedicated team of advisors to help investors in their financial planning for wealth creation journey. By carefully managing these factors, investors can potentially reap the benefits of global diversification and enhance their long-term investment returns.