Should you be investing in international equity funds? There is a wave of interest in investors to diversify their portfolio globally. This is also because we witnessed internationally diversified portfolios doing much better during the market crash last year.
Geographic Diversification of Portfolio
International equity mutual funds allow geographic diversification of your portfolio. It is good to be investing 10-20% of your long term portfolio in international equity funds. It can also provide a hedge against depreciating currency.
As explained earlier, investing in unrelated markets can act as a hedge against systemic risk in a particular geography and insulate your portfolio against massive drawdowns.
Types of International Equity Funds
There are many funds in the mutual funds space which invest in US, Europe, China, Japan, etc. Some fund invest directly into stocks while others are Fund-of-funds (FoFs).
FoFs invest in other mutual funds. In this case, they invest in international mutual funds. They may follow active investing or passive investing by tracking a global index. Those who are willing to take on a higher amount of risk can choose active investing funds while others can choose passive investing funds.
However, the cost structure of FoFs is higher than a normal mutual fund. This is simply because fund of funds incur twice the cost when they invest into another fund.
Tax treatment of International Funds
The tax treatment of international equity mutual funds is like the debt funds. If your holding period is 3 years or above it will be considered long term capital gains. The tax rate is 20% after indexation. The tax on Short term capital will be as per your applicable slab.
Although the tax treatment of these funds are a bit of a dampener, the benefits truly are greater in the long run.