Invest abroad through mutual funds? It’s not enough to have a decent paying job or well-settled business, if you aren’t frugal and invest your money for the future because you never know what will happen in your future.
Now, the question is how and where to invest money wisely. For a common man or a beginner, it’s really confusing as well as tricky to have proper knowledge about the pros and cons and invest his money.
I can get the questions on your mind right now are mentioned below:
- Top 10 international mutual funds in India?
- Can we invest in foreign mutual funds?
- Which mutual funds invest in foreign stocks?
- Can NRI continue to invest in mutual funds?
- What is Blue Chip Fund?
- How much should I invest in international funds?
- Which SIP is best for 5 years?
Before going so much. Take a deep breath and invest in yourself. After that read below.
What are the options where we can invest our money?
Throughout our academics in school and college, we were never given education about finance. So, it’s quite natural not to have any investment knowledge. But, it’s never too late to learn something which can be really effective for you.
Many people directly keep a portion of their salary in the bank but it’s not a very wise idea to save your money in the bank as with the time your money will lose the value in the bank.
Before investing your money into different sources, you have to be aware of Return, Risk and time. Return means how much revenue you earn from your investment. These three factors are co-related to one another.
So, there are mainly 4 ways to invest your money in India-
- Savings Account-In saving bank account, you can deposit and withdraw your money anytime which means there are no time restrictions. Saving accounts have minimum risk, but the return is meagre. It’s only 4% whereas the inflation rate of India in recent years was 4-5%.
- Fixed Deposits– Fixed deposit (FD) is one of the least risky options to invest money but there are time restrictions which means you can’t withdraw money before a certain period of time. The return rate is quite high (6%-8%).
- Gold & Jewellery- There is a moderate risk in investing in Gold & Jewellery. The prices of gold fluctuate often, so you have to keep the risk factor in your mind. You can’t expect a large percentage of return.
- Real Estate– You do need high capital to invest in Real estate and it has also low to moderate risk because it fluctuates a lot. For an instance, in March 2011, the return rate was 30% but in march 2018, it only gave 5% return rates.
- Stock market- You need to acquire good knowledge in the stock market to invest money because it has a high risk with high return. How much risky it can be, it depends on which stock market you are investing your money. That’s you need to have proper knowledge of how this works.
- Mutual Funds- Mutual funds is a special kind of investment through which you can do a diversifying investment at one place. Basically, you give your money to a group of expertise (Asset management company), and they invest the money in different places, and when the return rate is got collectively from different places, they give it and give a small return rate to themselves which is 1-2%.
Lets’s dig into Mutual Funds:
Now, you know what mutual fund is and how it works. But it’s time to know where you can opt for mutual funds.
HDFC, HSBC, ICICI, Aditya Birla, Reliance, TATA these are the examples of banks and companies who have started their own assessment management company where you can invest money and they will invest your money with the help of experts. How much return you will get it depends upon which mutual fund you choose to invest. The return rate varies. It’s basically from 4%-30%+.
If ASM invests your money in stocks, then it’s riskier than if it invests your money in government bonds.
Types of Mutual Funds:
Where The expertise of AMC invests your money, on that basis, there are different kinds of mutual funds.
We can divide it into 3 categories roughly-
- Equity mutual funds- Here the money is invested into the stock market. So the risk and return both are high.
|Parameter||Large Cap||Mid Cap||Small-Cap|
|Risk (Probability of negative return)||Low||High||Very High|
|Probability of exceptionally high return||Low||High||High|
|Company information availability||Very good||Good||Poor|
- Debt Mutual Funds- These mutual funds are invested on the debt instruments like bonds, debenture, certificates of deposits. There are different types of Debt mutual funds.
Liquid funds are the one which can be easily and quickly converted into cash(1-2 days). It has a very low risk. As an instance, you can think about it as an alternative for Saving Account. Example- Asset Liquid Fund
Gilt Funds where you invest money into government bonds. So, it doesn’t have any risk. Interest rated can be varied though.
Fixed Maturity Plan can be considered as the alternative to Fixed deposits(FD). It’s basically done for a certain period of time and has very low risk.
- Hybrid Mutual Funds- Basically, it’s a mixture of Debt and equity mutual funds.
If most of the money is invested in a debt fund then it will be called the Balanced Savings funds. Approximately the ratio is 70:30.
And the vice-versa of this is called a balanced advantage fund. That means the majority of money (70%) is invested at a higher risk.
Arbitrage mutual funds is also another kind of hybrid mutual funds.
How to invest abroad through mutual funds?
- Often we follow the trend without even thinking twice about that. We don’t analyze what are pros and cons and if we opt for that what are the consequences we have to face.
- For this sometimes we may feel many difficulties. Previously we already have discussed roughly mutual funds.
- It’s very sensitive if you don’t have proper knowledge about this. So, first, educate yourself and don’t jump into the bandwagon.
- The interest rates are high in mutual funds but risk-rated are also high at the same time. But, being well-aware about how to invest here, what the risks can be will definitely be thumped up for your journey in mutual funds.
So, before going with the flow go with grabbing knowledge and then go with the trend. In a nutshell, don’t blindly follow it, do a lot of research.
Nowadays, in mutual funds, the most well-known trend is to invest money in abroad through Mutual funds. But, here is a big question-Do you really know what that really is? Have you researched the core or you just got to know from other people?
One people get a high rate of interest through investing money in abroad that doesn’t mean you’ll do that without having the proper knowledge. If you do this, the chances are that you’ll be a failure. Because risks are always at a high peak. Be aware of this!
Channels to invest abroad through mutual funds?
First of all, what’s the meaning of channel here?
Well, let’s take a simple example- You can choose the different alternative to go to the office from your home. You can take a bus, metro, train or even book a cab. There are four alternatives to go to your office. The same thing applies here. You can invest abroad in different ways.
There are majorly four types of investing abroad
- FOF(Fund of the fund)
- ETF(Exchange-traded fund)
- Feeder fund
- Actively managed fund
When an investor invests into an Indian mutual fund which invests money into single or multiple mutual funds or abroad in abroad. And this will invest in stocks abroad. So, The investor gets exposure to investing in abroad indirectly. Example-Kotak Asset Allocator Fund
Types of FOF
- Asset allocation funds
- Gold funds
- International fund of funds
- Multi-manager funds
- ETF fund of funds
Pros and cons:
- Ultimate in diversification
- Professional management expertise
- Alleviation or risk and volatility
- Exposure tom assets usually beyond small investors
- The additional layer of fees
- Risk of overlap in holdings
- Difficulty in finding qualified managers, funds
When an investor invests money in Indian index ETF and that Indian ETF invests it into an index in abroad, that’s called Index ETF. So, the investor invests in index ETF in abroad indirectly as same as FOF. Example- UTI Nifty Index Fund.
There are many types of ETF:
- Index funds ETF
- Gold ETF
- Leveraged ETF
- Bond ETF
- Sector ETF
- Currency ETF
Pros and Cons:
- Trades like a stock
- Lower Fees
- Immediately reinvested Dividends
- Limited capital gains tax
- Lower discount or premium in price
- Less Diversification
- Intraday pricing might be overkill
- Costs could be higher
- Lower dividend yields
- Leveraged ETF returns skewed
A feeder fund is basically one of the sub-funds which puts all of their investors’ money into the main fund which is known as a master fund where a single investor advisor handles all the portfolios and traders. Example-Invesco Global Equity Income Fund
Pros and Cons:
- Cost benefits
- Possible tax savings
- Offshore funds are typically subject to a 30% withholding tax on U.S. dividends
- Different investments tactics may not be suitable all the time
Actively managed fund:
When an investor invests his money in an Indian mutual fund where the fund manager usually decides in which stocks he’s going to invest.
Obviously, those stocks are foreign stocks. So the investor gets access to the foreign stocks indirectly. Example- American Funds Growth Fund of America.
Pros and Cons:
- Helps to beat the market index
- Several funds have posted huge returns
- Most managed funds tend to underperform
- The unpredictability of the performance of the funds
- Taxes and fees diminish the fund’s performance
- You have to a flat fee regardless of whether your fund does well or does poorly
Now, we can easily segregate the different types of mutual funds through which we can invest our money and earn the profit.
Why should one invest abroad through mutual funds?
Many have certainly this question in mind at least for once- What are extra benefits one can have thorough the investment in abroad.
So, there are certainly extra benefit, one can have-
Suppose, you are travelling somewhere and for safety, you hide you all money in your wallet. Unfortunately, all the money got stolen. But if you hide you in different places then you have at least some money left with yourself. The same thing goes with it. If you have the chance to invest in the abroad country along with your own country, thrown why not take the chance?
Suppose, in 1990 the exchange rate was,
1 USD= 17.50 INR
In 1992 you invested your money in international funds
And now in 2020, the current exchange rate is,
1 USD= 73.50 INR
So you get a higher return. It’s a plus point for you.
Taxation of international Funds?
If you invest in international equities, it’s treated as it’s a dead mutual fund. So, short term gain in this international fund will be treated as dead fund and that is why it will be taxed as per the individual tax bracket.
If it is a long term then it will be taxed at the rate of 20% indexation.
Short term, as well as a Long term, are depending upon a certain period of time which will be 36 months.
Anything which is holding for less than 36 months will be considered as short term and if it is for more than 36 months, then it will be considered as long term.
Risk and Rewards to invest abroad through mutual funds?
The way mutual funds work can be really a turning point in your investment journey. If you have awareness about mutual funds, types of mutual fund and when to invest, you can easily regain a good amount of return.
But, one thing we need to keep in mind is whenever we opt to invest in mutual funds, doing research thoroughly is crucial as the different companies have different rates of interest.
Always be prepared for loss as well because it’s the scenario where one day the market can be at peak level and another day it can be down also.
Investment abroad through mutual funds is also an exciting chapter but at the same time, you have to study thoroughly about the foreign market, risk factors, how to proceed. Everything has pros and cons.
So, be alert of the consequences and approach the foreign market as per the situation, market condition.