International mutual funds may be a good bet despite new tax norms
July, 21st 2014
Experts advise investors to stay put in these funds as they offer diversification to portfolio. However, exposure should be limited to 10%, says ET.
Many investors are rethinking about their investments in international mutual funds -schemes that invest in shares of companies that are listed overseas. The Budget proposal to change long-term capital gains tax on non-equity mutual funds is going to rob a chunk of the post tax returns. Also, investors will have to stay invested in these schemes for a longer period of 36 months to qualify for the long-term capital gains tax of 20%. Earlier, investments of more than a year used to qualify for long-term capital gains tax of 10%.
No wonder, many investors feel that it may be time to exit these schemes.
However, experts advise against such a knee-jerk reaction. "Though tax treatment of these funds has worsened, investors should remain invested in a fund that gives them exposure to international equities, since they have low correlation with Indian equities and offer meaningful diversification," says Vijay Chhabria, founder, Prudent Investment Advisors. These schemes are meant for long-term investors seeking risk adjusted returns, he adds.
Sankaran Naren, chief investment officer, ICICI Prudential Mu tual Fund, also feels that these schemes are asset allocation products offering diversification and are expected to deliver over a long period of time. "Like any other equity investment, investors are expected to take a long-term view on these schemes," he explains. He advises investors to have at least three-year view for these schemes.
Meanwhile, Harshvardhan Roongta, principal financial planner, Roongta Securities, says, "International investing allows us to invest in businesses that we do not get to invest here in India and it also offers us exposure to various currencies, which, in turn, brings in portfolio diversification." He advises investors not to give much weightage to taxation in the decision-making. Advisors like him are of the opinion that the benefits these schemes offer to one's portfolio are far higher than the impact of increased taxation proposed in the recent Budget.
They advise investors to keep some allocation to these schemes with more than three-year view and limit exposure to these schemes to 10% of the overall portfolio.
However, experts also ask investors to take a closer look at the schemes before investing. "Consider investing in developed markets such as USA due to the low correlation it has with Indian equities and relative stability of US dollar as against other currencies," says Chhabria. He recommends ICICI Prudential US Bluechip Equity Fund. Roongta too prefers developed markets such as USA and Europe given the low correlation they have with Indian equities and recommends investing in Franklin India Feeder Franklin US Opportunities Fund. He asks investors to avoid thematic funds in international funds category dedicated to themes such as gold mining, natural resources and agriculture, and stick to funds with diversified mandate.
One can also consider equity funds that invest at least 65% of their portfolio in Indian equities and rest in foreign equities, say experts. Mirae Asset India China Consumption Fund, ICICI Prudential Indo Asia Equity Fund follow this investment pattern and park some money in foreign equities. These schemes are treated like equity funds for taxation and do not attract any tax on capital gains if the investments are held for at least one year.
"These schemes suit the needs of retail investors who may be keen to invest in limited number of schemes due to inability to track multiple schemes" says Chhabria.
He recommends investing in Templeton India Equity Income Fund due to its long-term track record.