How to Invest in International Markets with Mutual Funds

Why should one invest internationally?

By not investing in international funds, you risk missing out on promising opportunities like Google and Facebook.

When you invest in an Indian fund, you don't get exposure to that. These are equally promising or even very promising businesses and opportunities.

The other reason is diversification - reducing risk while accessing great opportunities.

Suggested read: International funds should be a routine choice

Why should one invest abroad through mutual funds?

Indian investors have been permitted to invest abroad. You can open an account, and you can remit $200,000 every year to invest in a portfolio. However, it's complicated. You have to take a risk with the broker, manage purchases yourself, and ensure legitimacy. After all, what will you do if the broker goes bankrupt?

When you invest in a mutual fund, you have an overlay of safety under Indian regulations. A regulated entity invests either in a fund of funds or directly in those stocks. You have the safety net of Indian regulation and simplified taxation.

There's no restriction or any such limit. Also, you'll get actively managed funds, and the taxation will be simpler. The moment you invest directly abroad, you face complicated filings. You need to ensure proper reporting, which isn't aggregated as easily as Indian investments.

Here, everything - whether from brokers or mutual funds - gets aggregated via platforms like NSDL, CDSL, CAMS, Karvy, or MF Central. Capital gains statements, transaction reports, and other essentials are easily accessible.

By investing through such funds, you gain exposure to international opportunities with the safety of the Indian regulatory framework.

Suggested read: 35 funds that can help you invest outside India

How can one invest in the international markets through mutual funds?

There are many funds. Indian mutual funds were permitted to invest abroad a long time ago, but there were restrictions. Some funds hit the ceiling limits.

Here's how the limits work:

• The entire mutual fund industry can invest up to $7 billion.
  
• Each AMC (Asset Management Company) can invest no more than $1 billion.
  
• For ETFs, the ceiling is $1 billion for the industry, and individual ETFs have a ceiling of $300 million.

Currently, about 25 to 30 funds are still accepting investments, providing this interesting avenue.

In addition, there are five to six other avenues available. For example, ETFs that have already hit their limits but are listed in the Indian market. While they cannot create new units, you can still purchase them from existing holders in the market. After all, when a person sells, you can pick up the ETF, and no additional unit gets created.

Suggested read: How to choose international funds?

Viewer's question

Please suggest a fund that can be used for SWP at the age of 60.

Assume you have Rs 1 crore in your bank account, and you need to start an SWP (Systematic Withdrawal Plan). Suppose you require Rs 6 lakh a year, which equals Rs 50,000 per month. This is a moderate expectation - not very aggressive, not very low.

For withdrawing Rs 6 lakh annually from a one-crore investment, an aggressive hybrid fund can work well. Over a 10-15 year period, such a fund can generate anywhere between 9-14 per cent returns on average. Some years, it may perform exceptionally well; in others, it may not.

When you withdraw 6 per cent, the rest of the money accumulates and supports higher income needs in the future.

Here's the key principle:

• If your withdrawal rate is low - say 2 per cent - you can invest in small-cap funds.
  
• If your withdrawal rate is moderate - about 5-7 per cent - you should allocate one-third to fixed income and the rest to equity.
  
• If your withdrawal rate is high - 8 per cent or more - you must get conservative with your allocation.

This is the paradox: the less you need, the more aggressively you can invest. Higher risk can generate better returns, but only if your income requirement is small relative to your capital. After all, you need more time to allow your money to grow.

Also read: Setting up an SWP for regular income? Here's what to expect

This article was originally published on December 13, 2024.