If you are wondering to yourself, ‘should I invest in international funds?’ then consider this: In 2019, the BSE Sensex returns were 14.94%. But had you invested in the US market, you would have enjoyed double the returns at 28% of the S&P 500 benchmark index. Similarly, in 2020, when the pandemic hit, stock markets around the world were impacted and Sensex returns were -23.98%. However, if you had investments in Japan, they would have only corrected by -11.63%. This is why more and more people are looking to include international investments such as international mutual funds in their portfolios. You get the opportunity to enjoy higher returns and reduce the risk of volatility of markets. So, now to answer the question, ‘should you invest in international mutual funds?’ - Yes, you should definitely consider that.

Before you go ahead and invest in international mutual funds in India, however, here are some essential dos and don’ts you should keep in mind.

1. Do look into the different types of international mutual funds
   
   The first thing you should consider is the type of international funds you want to invest in. Do you want to invest in a global fund that invests in both, international markets as well as the Indian market? Or perhaps you’d like to invest in a region-specific fund to benefit from emerging markets in a geographic region? You can also invest in a sector-specific fund that invests in companies of that one sector, such as healthcare, across the globe. But if your eyes are set on the economic trends of one country’s market only, such as the US, you can also choose to invest in a country fund.
   
   
2. Don’t invest for a period of less than five years in international funds
   
   When asking yourself, ‘should I invest in international mutual funds?’, an important thing to consider is your investment horizon. You should understand that when entering international markets, your aim should not be to trade but to build your portfolio and meet your financial goals by holding the investments for a certain period of time. You should have an investment horizon of at least five years when investing in international funds. This is primarily because that gives your mutual fund investments enough time to iron out any geopolitical risks that could lead to short-term fluctuations. There are also tax benefits like indexation when you stay invested for the long term.
   
   
3. Do invest in markets that have a low correlation to India
   
   One of the primary benefits of investing in international funds is exposure to different markets to hedge risk of your overall investment portfolio. This is because the markets of different countries are not perfectly synced. You should look at investing in countries that have a low correlation to the Indian market. It’s important to note that low correlation doesn’t mean negative correlation. For instance, US and Indian markets move in the same direction and have a positive correlation. The question to ask here is, to what extent are the two markets correlated? Over the last 10 years, the two markets have shown a low correlation of about 0.36, as per data by Bloomberg, Capitaline.
   
   
4. Don’t invest a high percentage disregarding your risk appetite and goals
   
   When considering, ‘should I invest in international funds?’ another thing to pay heed to is the percentage of exposure. Exposure to international investments is healthy for your portfolio. However, you should consider the proportion of allocation that aligns with your current portfolio, risk appetite, and financial goals. Generally, experts believe that a 10% to 15% exposure to international investments is a good balance. This, could, however, be as low as 5% or as high as 25% depending on your goals and strategy. Hence, you should consider that when investing in international funds and not get carried away by what those around you are suggesting based on their risk tolerance.
   
   
5. Do know how international mutual funds in India will be taxed
   
   International funds, even the ones that are equity-oriented, are treated as debt funds for the purpose of taxation in the country. If you hold the international funds for less than three years, they are considered as short-term capital gains and are taxed at your income slab rate. Conversely, if you hold the international funds for over three years, they are considered long-term capital gains and are taxed at 20%. There is an indexation benefit that comes along with long-term capital gains tax that allows you to adjust the purchase price of your investment according to the inflation index. So, the 20% is applicable after adjusting for inflation. This is also why you should hold international funds for a longer period so that they can be considered as long-term capital gains.
   
   
6. Don’t disregard the impact of currency fluctuations
   
   When investing in international mutual funds in India, currency fluctuations can translate into profit or loss, depending on the currency of the country you have invested in. For instance, if you have invested in the US, and the rupee depreciates against the dollar, it will be advantageous for you as it would increase the rupee value per dollar of your investment. That’s why when asking yourself should you invest in international mutual funds, make sure you consider the currency of the country and how the changes in the exchange rate will impact your investment.
   
   
7. Do understand the costs involved
   
   Another thing to consider when asking yourself, ‘Should I invest in international mutual funds?’ is the fees and expenses involved. The Asset Management Company (AMC) will charge a fee called the expense ratio for the fund’s administrative and operating expenses. The expense ratio on international mutual funds in India is charged on an annual basis and is usually between 0.5% and 1.5%. Another thing to consider is the foreign currency markup fee charged, about 3%, every time you send or repatriate funds. Hence, another reason to stay invested in the long term in international funds is to ensure that the returns you are earning either from the investment’s value increase or through currency fluctuations are higher than these costs.
   By now, the question of ‘should I invest in international mutual funds’ and how may have been answered. However, if all of this seems overwhelming, you can consult a financial expert who can help you build your portfolio by including the kind of international funds and other investment avenues that align with your financial goals and risk tolerance.

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