Before you invest in a global fund, you need to get a few questions answered. Only then would you be able to make an intelligent choice.
1) Would you like a global exposure?
It is not mandatory to have a global fund in your portfolio, but those who are well diversified in the domestic market could consider this. Global investing has caught on in the U.S. but not in India. According to USA Today, in 2014 investors poured an estimated net $228 billion into international funds.
Emerging markets guru Mark Mobius did a study of 72 stock markets over 25 years. He found that there was not a single market that was the best performing one over two consecutive years. And only one market was the best performing in four of those 25 years; Turkey.
In 2013, the U.S. stock market soared. The Dow was up 26%, S&P 500 gained more than 29%, and the Nasdaq surged nearly 40%. This feat was not repeated the next year, though the market rose. In 2014, the Dow was up 7.5%, the S&P 500 11.4%, and Nasdaq 13.4%.
Hence it does make sense to invest in another market.
The Indian market is not always on a roll. In 2011 when the domestic stock market was battered, a marginal exposure to another geography would have helped curb the hit a portfolio would have taken.
But consider a global fund only if your portfolio is well diversified domestically and your core holdings are in place.
2) What sort of fund are you looking at?
All funds are not alike.
Funds with international exposure will fall into the Morningstar category of global funds, but make no mistake – they are not identical. They are all not similar in their structure and mandate. When you decide to have an international exposure in your portfolio, you will have to decide how much it should corner of your portfolio. Then go one step ahead and decide what sort of exposure you need.
Do you want a fund which combines international and domestic exposure or a pure global fund? Do you want a feeder fund or a fund which buys stocks directly? Are you looking for an exposure to a particular geography? There are funds focused on Latin America, U.S., Japan, Brazil, China and emerging markets. Or are you looking at a thematic exposure?
3) Do you want a really risky exposure?
Continuing in a similar vein to the earlier point, it again boils down to what you are looking at. There are funds focused on global real estate stocks, mining stocks, gold miners, agriculture stocks, commodities and energy. These naturally would be riskier bets. Take a look at DSP BlackRock World Mining fund. Over the past four years, the fund has delivered negative returns. Will mining stocks ever pick up? They should, after all they are cyclical. And the fund did deliver 25% in 2010. But it this the type of fund you would like exposure to?
Do note these thematic funds invest only in that particular theme across the globe. These are risky bets and could add to the volatility of your portfolio.
4) Are you confusing a domestic gold fund with an international one?
A Gold ETF is offered for investors who want to invest in gold. Instead of buying gold and storing it in a bank locker, you can invest in a gold exchange traded fund where the asset manager buys the gold and sells units to investors.
On the other hand, a global gold fund, such as Kotak World Gold Fund, is a feeder fund that invests in a master fund where the fund manager invests in gold mining stocks across the globe.
Investing in a gold mining stocks is very different from investing in gold.
5) Have you considered the tax angle?
An equity oriented mutual fund is one where a minimum 65% of the investible corpus is invested in domestic equity.
If you sell an equity mutual fund after holding it for a period of 12 months, then it qualifies for long-term capital gains. As of now, long-term capital gains on equity funds is nil. So you pay no tax.
If you sell your equity mutual fund before this period, then it qualifies for short-term capital gains, which is 15%.
International funds do not invest a minimum 65% of the corpus in domestic equity, they invest in global equity. So they are taxed as debt funds.
However, check the portfolio. PPFAS Long Term Value invests 65% of its corpus in domestic stocks and the balance in global stocks to qualify as an equity fund. But funds whose portfolios sport no Indian stocks will be taxed as debt funds.
Short-term capital gains would be levied if the holding period is less than 36 months. Short-term capital gains are added to the income and taxed as per the individual's income tax slab. If you sell the fund after holding it for a period of 36 months, it qualifies as long-term capital gains which is 20% with indexation.
