Investing in international markets have distinct benefits and can help investors in long-term wealth creation. Thanks to globalization and opening up of cross-border investments allow investors to capture opportunities to diversify their portfolio in international markets and explore investment opportunities outside the universe of Indian markets.
Advantages and benefits of investing in foreign markets
Investing in international markets can help you diversify your portfolio, yield better results and also lower the overall risk of your portfolio.
The unique advantages of investing in global markets are-
- 1). Diversification
Geographical diversification is a valid motive to invest in the overseas market as it helps you gain exposure in the success of different markets and also helps safeguard portfolio from any adverse economic and market events affecting your domestic investments.
- 2). Growth through global exposure
Without doubt, India is one of fastest-growing economies and offers immense potential. However, the Indian market is still in its growth stage and your clients might not find varied investment avenues. International investments allow investors to participate in the growth stories of other economies.
How to invest in foreign markets?
A few years back, investing in foreign markets was no less than a herculean task for small investors. But today there are many investment options available which encourage investors to conveniently invest in foreign markets. Here is a quick look at the simplest ways to gain foreign investment exposure in your portfolio-
- Making investments through ETFs
You can take exposure in international markets by opening an overseas trading account and buy ETFs of international indices which will give you exposure to international stocks. As ETFs replicate the movement of the index to a large extent, they help eliminate market risk and trading risk of your investment.
- Mutual Funds
One of the easiest ways to get international exposure in your portfolio is via the mutual funds registered in India. Mutual funds help you take advantage of the professional knowledge and expertise of the fund manager to manage your funds in international markets. There are various mutual funds schemes which offer international exposure like
- a). International FOF
These funds invest in many other countries outside India.
- b). Country specific funds
These are country-specific funds and invest in the markets of that specific country, such as Brazil, Spain, US, etc.
- c). Sector specific funds
These funds invest in specific sectors across different countries such as energy, gold, etc.
- a). International FOF
Pros and Cons of investing in foreign funds
Investing in foreign funds offers several advantages to the investor. It allows retail investors to invest in the stock markets of other countries in their currency and helps diversify their portfolio in different geographies. Professional management and easy liquidity make it very convenient for investors to invest in these funds.
However, just like any other investment, investing in foreign funds has its disadvantages. Some of the major risks to consider before investing in foreign funds is the value of investments being affected by currency fluctuations. Also, any political, social or economic unrest in the country/countries, where the funds are invested can hurt on your portfolio.
Charges and costs
Foreign mutual funds charge an expense ratio of 0.5% to 2.5% per annum which covers all the costs and you are not required to pay any currency conversion or other charges.
On the taxation front, gains made on investments in foreign funds are taxed in the same manner as debt fund investments. If the holding period of your investment is 3 years or more, then the gains are taxed at 20%. If the holding period is less than 3 years, then the gains are added to your total income and taxed as per your slab.
Conclusion
As an investor, you must diversify your portfolio across various asset classes and also across geographies to achieve complete diversification and reduce the risk of your portfolio. Taking advice from financial advisors and investing through mutual funds can help you achieve your goals.
