Rather than investing in international funds, the best way to have global exposure is by buying domestic funds that invest abroad
26-Sep-2014 •Research Desk
The case for investing abroad is something that we have stated time and again for the diversification that it offers. While international mutual funds do offer a window to invest abroad; they do have their share of limitations. For instance, international funds have a significant tax disadvantage as they are treated as debt funds and taxed accordingly. The tax implications hurt further post the recent budget, as all gains arising from these funds within three years of investment will be treated as income and be eligible as capital gains with indexation if sold after three years.
The best way to take international exposure through mutual funds, is to invest in an equity fund which also invests abroad. This way you retain the tax status of a domestic equity fund, which is far more efficient. The way to follow this strategy is to first identify funds that have the mandate to invest in international equity and then check their portfolios for the kind of global exposure they have. We scanned the data for 381 open-ended equity funds launched since 2000 and found that 42 funds invested in foreign securities at different points of time; of which 16 presently have foreign securities in their portfolios.
On closer examination we found PPFAS Long term value which had 18 per cent exposure to foreign security with 8.21 per cent of its net assets as on July 2014 in technology major Google. The other international holdings include 3M, Nestle and IBM in this fund.
Some other funds do have a higher international exposure, but they are invested in global feeder funds that have international exposure, bringing in an element of passivity. Another fund with significant exposure was Motilal Oswal Multicap 35, which added Berkshire Hathway to its portfolio in May this year.